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Wednesday, September 21, 2005


In the last 12 hours:

NZ Herald Report: "The Federal Reserve raised US interest rates this morning (NZ time) for an 11th straight time, signaling more increases to come...a quarter of a percentage point to 3.75 per cent."Additional report.

Stats NZ Report: "the current account deficit for the year ended June 2005 has widened to $11.9 billion, compared with a revised March 2005 year deficit of $10.9 billion and a $7.2 billion deficit for the June 2004 year... foreign investment in New Zealand of $222.4 billion and New Zealand investment abroad of $97.9 billion. In terms of the size, this means a debt of $30,355 for every New Zealander, compared with a $27,483 debt at 30 June 2004." But this is supposedly not as bad as they had thought - so what? It's chronic and getting worse whatever way Stats want to spin it.

@11:50am: NZD at 69.8c US
@12:40pm: 69.6c

As I have said previously we are at risk of what Treasury has called "a rapid and substantial market-led exchange rate depreciation," that they say may occur very soon because of our over-valued dollar. On top of our structural problems (inflation blow-out being a symptom rather than a cause) this seems a fair assessment by the black suits of The Terrace.

Given our political instability at the moment and the other two events mentioned above we have the beginnings of an alignment signalling Treasury's scenario. Watch also the slipping value of NZD v. AUD - this is a key indicator of our real position.

@12:20pm: 90.8c! - we were at 91.5c only yesterday.
@12:40pm: 90.6c

I think that NZ will benefit from our depreciation overall - despite oil becoming more expensive and the short-term inflation pressure. Our exporters need this.

Savaia Stevenson, Internal Communications Adviser, Reserve Bank of New Zealand has responded (and promptly I might add) to these questions:

RBNZ forex intervention policy

1. What protocols exist for the use of RBNZ controlled funds or
instruments to buy NZD in the foreign exchange market?

The Reserve Bank (the Bank) holds foreign reserves for the purpose of
intervention in situations when the foreign exchange market becomes
dysfunctional - i.e. when it is or seems likely that market participants
will stop trading with each other - perhaps in the face of significant
economic or financial shock. Foreign Exchange (FX) intervention occurs
in consultation with, and on the authority of, the Minister of Finance,
in line with provisions in the Reserve Bank Act. The Bank has a limited
authority to intervene without prior consent of the Minister on the
understanding that the Minister be informed, and his authority obtained
as soon as possible. This limited authority gives the Bank the ability
to respond to rapidly changing events in the FX market.

2. What is the floor for it's use and for which currencies?

The focus of intervention is not on the level of the exchange rate but
on the basis functioning of the market - hence there is no particular
level of the exchange rate that would be associated with intervention.
The Bank would likely focus intervention in the NZD/USD currency pair as
this is the most activiely traded currency pair used in the markets.

3. What are the quantity of funds that can be used/are available?

The Bank holds around 1.9 billion Special Drawing Rights (SDR) or NZD
3.85 billion of reserves currently and is in the process of building
reserves to a minimum level of SDR 2.45 billion over the next couple of
years. In addition, the Treasury has access to foreign currency that
will be made available to the Bank for use in a crisis.

You see from the above answers (esp. 2) that the RBNZ's policies are to ensure the smooth operation of the market, but this will necessarily put a break on any depreciation. This could be interpreted as "managing" it down. But it tends to "prop it up" and therefore cause over-valuation because it is one-sided. I say their policies that focus on market turn-over locks in a drift upward in the NZD as opposed to having the odd mini-crisis that would let the NZD find it's "real" - or to use Treasury's term "equilibrium" - value. With these policies the RBNZ will facilitate the crisis of which Treasury warns.


At 22/9/05 12:56 am, Blogger Bomber said...

Nasty. I've said before that the triple A (or whatever it is) top credit rating may be the trigger. But Cullen keeps stashing the surplus in foreign assets which (I think) would keep it up.

I've asked the RBNZ some further questions about it's intervention policy, viz: does Treasury's funds include the Super "Cullen" fund and has the bank intervened in any way over the last year. You know... the sort of questions Mr Soros would be asking.

At 22/9/05 2:07 pm, Blogger Bomber said...

PQ: I wish I had a PQ dslyxctoniary so I could work out even half the stuff you say! But don't worry about my maths, since yesterday morning everyone's been saying the same things about our dollar that I've been saying for the last few weeks.

Thanks for the Medal of Courage, if you create an icon for it I'll attach it on the sidebar.

The zircon issue, tragic as it seems, elludes me.

At 23/9/05 8:23 pm, Blogger sagenz said...

the crash is coming, that is for sure.

At 14/10/05 9:37 pm, Anonymous Anonymous said...

as the referred maker of 'understatement' it may interest you to know that a currency 'correction' has been confidently predicted by economists for about two years now.

The NZD needs to depreciate, but it is still being propped up at very high levels due to (1) high commodity prices (2) still very strong yield support and (3) record levels of offshore NZD denominated bond issuance (uridashi and eurokiwi). What is needed now is a catalyst for a depreciation, given the currency is over-valued - i think this will come from growth. once you see the economy plunging into a big black hole...

At 16/10/05 1:07 am, Blogger Bomber said...

Yes - if Bollard puts it up on the 27th Oct. then the exchange rate will hold up.


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