History has been made with the Reserve Bank of New Zealand intervening for the first time ever to weaken their currency.
History has been made with the Reserve Bank of New Zealand intervening for the first time ever to weaken their currency.History has been made with the Reserve Bank of New Zealand intervening for the first time ever to weaken their currency. After raising interest rates to 8 percent last week, intervention was the last thing that analysts and traders were expecting. Clearly, the RBNZ?s intervention and interest rate hike lead to completely inconsistent results. Unfortunately the Kiwi has become a one way bet and given the need to continue to raise interest rates, the RBNZ felt that if they did not inject some sort of uncertainty into the direction of the currency, it would have most certainly hit 80 cents by the end of the year. The timing was perfect with the Australian markets closed for the Queen?s Birthday. However the effectiveness of this intervention will probably be limited because the “goal” or outcome of intervention is generally to increase the money supply, which effectively reduces interest rates. However the RBNZ clearly does not want interest rates to fall, in fact, they are expected to continue to raise rates going forward. Therefore it extremely likely that they will sterilize this intervention in order to neutralize the impact on the money supply. Sterilized intervention requires offsetting intervention with buying or selling of government bonds. By doing so, the intervention is less effective than unsterilized intervention and choosing this option suggests that the central bank is simply trying to send a message to the market rather than reverse the impact of its interest rate hike. For more details, see our Special Report (New Zealand Currency Intervention: Is it Enough to Kill the Carry Trade).Interestingly enough, the Australian dollar has held up extremely well which indicates that the market is not expecting a similar move by the RBA. Dollar strength has only had a limited impact on the Canadian dollar which held steady thanks to a sharp rise in housing prices in the month of April.