New Zealand Central Bank Admits Currency Intervention (May 2013)

currency_wars

Source: WSJ – New Zealand Central Bank Admits Currency Intervention

Notable excerpts:

New Zealand’s central bank said it had intervened in foreign currency markets and would do so again if needed to contain a soaring local currency that’s dragging on tourism and denting the competitiveness of the nation’s agricultural exports.

The remarks, by Reserve Bank of New Zealand Gov. Graeme Wheeler, sent the Kiwi tumbling nearly a cent lower to US$0.8361 from US$0.8460 on Wednesday. The governor also said the Kiwi was “overvalued…perhaps significantly,” signaling the currency’s high level remained a concern.

Intervention by central banks can drastically change the value of a currency by disrupting normal market operations, sometimes significantly in the case of a major central bank like the Bank of Japan or Swiss central bank, making such moves potentially controversial. In the case of smaller central banks such as the Reserve Bank of New Zealand, though, their firepower is limited if they come up against a larger central bank or major hedge fund betting that the currency will go higher.

The New Zealand dollar has risen about 10% in the past year against a basket of major currencies. Official data already show the central bank has actively intervened by selling New Zealand dollars in recent months, but the Reserve Bank until now hasn’t explicitly called it an intervention.

“We’ve indicated on the record that we are prepared to intervene in the exchange rate,” Mr. Wheeler said in a testimony to lawmakers. “We would not expect, given the strength of the flows, that intervention would materially change the level of the exchange rate, but we could take potentially the tops off rallies. And in terms of activity, there has been some.”

In December, the central bank sold nearly NZ$200 million in the most significant sale in nearly four years, official data show. The pace of its sales slowed early this year, with the central bank selling only NZ$28 million in the first three months of the year combined. The Reserve Bank is due to release foreign currency transaction data for April later this month and some analysts say the intervention may have gathered pace again.

Bank of New Zealand economist Stephen Toplis said the market reaction Wednesday was a “storm in a teacup,” adding that the central bank was likely to continue selling small amounts of its reserves “as part of their normal operations” whenever the local currency rose sharply.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s