RBNZ confirms intervention in NZ dollar

Remember back in 98 when Anwar Ibrahim as Finance Minister intervenes in the currency market to prop up the ringgit?
Well, this story reminds me of that time. Only the opposite is being done, Allan Bollard intervenes in the currency market to sell down the kiwi dollar.
Technically, selling down your own currency doesnt cost a thing (well, perhaps pride), you just have to print your money, ie increase money in circulation, and exchange it with foreign currency.
But if you buy up your own currency to prop up your money's worth, then it cost every cent.
Do you think RBNZ measure will be successful? Depends on how much money he is prepared to print, if he is successful, this will undermine overseas investor confidence in NZ method of doing things.
So we cannot classify Kiwidollar as free floated any more. It will be dirty float, or managed float.
RBNZ confirms intervention in NZ dollar
By GARETH VAUGHAN - Fairfax Media | Monday, 11 June 2007

INTERVENTION: Reserve Bank Governor Alan Bollard has intervened to bring down the value of the kiwi dollar.


The Reserve Bank has intervened in the international currency markets for what is thought to be the first time in more than 20 years in an attempt to force down the value of the Kiwi dollar.
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The NZ dollar tumbled more than 1 per cent against the US dollar today as currency traders in Asia cited rumours that the RBNZ was intervening.

The kiwi slid to US75.25c from near US76.20c before the rumours circulated.

The RBNZ confirmed this afternoon it had intervened, selling New Zealand dollars, with a brief statement attributed to the central bank's governor Alan Bollard saying: "As stated in our June Monetary Policy Statement, we regard current levels of the exchange rate as exceptional and unjustified in terms of the economic fundamentals. This action does not prejudge the future direction of monetary policy, which as always will remain dependent on emerging economic trends."

Reserve Bank spokesman Mike Hannah declined to comment further on the bank's action, or any potential further action. The bank has $7 billion in reserves it can use as a stabilisation fund.

The Kiwi reached a peak of US76.40c on Friday, its highest level since the being floated in March 1985.

The Kiwi extended recent gains after Dr Bollard raised the official cash rate to 8 per cent on June 7 in an attempt to stem inflation.

New Zealand's interest rates are among the highest in the 30 nation Organisation of Economic Co-operation and Development (OECD), and therefore enticing to overseas investors.

Dr Bollard's mandate is to keep inflation between 1 per cent and 3 per cent and his sole tool to do so is by raising interest rates.

This has fuelled strong overseas investor demand, especially from Japan, where interest rates are below 1 per cent.

Billions of dollars worth of Uridashi bonds - issued to Japanese investors who borrow cheaply in yen, receive the bonds denominated in Kiwi dollars and earn New Zealand interest rates - have helped prop up the Kiwi dollar.

The RBNZ was quoted as saying it regarded current levels of the exchange rate as exceptional and unjustified.

Finance Minister Michael Cullen said the intervention was a reminder that investors in the NZ dollar could suffer losses.

Most economists polled by Reuters do not expect interest rates to fall until mid- to late 2008.

"Dr Bollard has been saying for some time that he sees the exchange rate as exceptionally high and unjustified on the basis of New Zealand's medium term fundamentals," Dr Cullen said.

David Tripe, director of the Centre for Banking Studies at Massey University, said this was the first time the RBNZ had intervened in the currency market for more than 20 years.

"It is the first time (the bank intervened) since we have had a fully floating exchange rate.

"The interesting question is whether it will have any long term effect past today. We may well see the dollar going back up again tomorrow."

Tripe said this was one of the challenges the RBNZ faced in intervening. However, it has the potential to do so again if today's move did not have the desired effect.

Tripe said that if there ever was a right time for the RBNZ to intervene, this would seem it with the dollar at exceptionally high levels.

"It will be very nice from the Reserve Bank's perspective if it did have longterm effect but I wouldn't be confident that it will. It will depend on how much they spent today to see if this is a one-off move or there is potential to do it again.

"The impact of it is really quite uncertain."

ANZ Investment Bank head of foreign exchange John Body said it appeared to have been effective.

"There was a price spike on Friday night which was unjustified, so it's really smoothed that price spike out.

"It's quite a thin trading day being an Australian holiday, so the RB seems to have been very successful initially, but it will be interesting to see what the London market does.

"You'd have to suspect that London and US markets will try to take the kiwi lower, and I think we could see the kiwi trade down to US73.50c on the back of this," Mr Body said.

Intervention was initially an effective deterrent, but became less effective the more times it was used.

"Given it's their first time and it's clearly thought out, I think it's going to be highly effective."

National's finance spokesman Bill English said that intervention was risky because the weight of money in the market was much greater than the resources of the Reserve Bank.

"But we hope for the sake of exporters that it will work.

"We can only presume that he's decided to intervene because he thinks he's at a turning point, and that a combination of lifting interest rates and intervening in the dollar might precipitate a fall in the dollar," Mr English said. with NZPA and Stuff.co.nz