The Reserve Bank’s $4.2 billion gamble
Who is the biggest currency speculator in New Zealand politics? No, not John Key, the former Merrill Lynch trader and National party leader. Not by a long shot.
The biggest gambler on the New Zealand dollar is the Reserve Bank, which has been playing the currency market to the tune of $4.2 billion in the last year to try to keep the price of the dollar down, according to figures published by the Bank.
This is the opposite of the "carry ‘trade,’" said National associate finance spokesman Craig Foss, “and carries huge risk.”
This raises two obvious questions: how long can the bank continue to sell into the market while the dollar remains relatively high? And should our central bank be taking a punt of this size with public money in the hope that it may be helping exporters keep the dollar slightly lower?
In June 2007 the bank made what was regarded as a dramatic if only very briefly successful attempt to lower the value of the New Zealand dollar by selling $736 million of its reserves into the market.
The dollar fell for a short time by 1.8 per cent. New rules introduced in July were intended to make it easier for the bank to trade currency without shocking the market.
Since then, it has sold off reserves regularly, totalling a staggering $4.197 billion by May – up from only $6 million in May 2007.
The Reserve bank has taken a “long” position on foreign currency – that means it is betting on the value of the dollar falling against the foreign currency it has bought, so that when it buys back the $4.2 billion of New Zealand currency it has sold, it will have made a net gain.
Right now this neither a gain, nor a loss to the bank. As the New Zealand dollar falls, as the economy weakens, it may provide windfall gains to the Bank. Nonetheless, there is a question as to whether the Bank should be acting as a large-scale currency speculator attempting to set a value for the dollar in the international marketplace.
“This is taxpayers’ capital being put at risk,” said Mr Foss. The New Zealand Superfund is already heavily exposed to fluctuations upward in the value of the dollar, he said.
“I am not sure that tax payers will be comfortable with so much of their wealth being placed at risk in the foreign exchange markets.”
In its statement of intent for 2008-2011 released today, it’s assumed the bank’s foreign currency position (that is, its exposure to the vagaries of foreign exchange fluctuations) will remain at $3.7 billion for the remainder of the June 2009 financial year. (That was the size of its exposure at April 2008.)
But the bank’s foreign currency position has already ballooned out after it sold off another $511 million in May this year, when the dollar briefly peaked near US80c.
The first intervention happened when the value of the dollar hit US76.40 cents, which Reserve Bank Governor Alan Bollard described as over-valued.
The bank’s biggest attack on the value of the dollar was to sell-down $1.49 billion in July last year, the second month it intervened. The subsequent months were relatively quiet, until the Bank renewed its program in February, selling off $472 million, then $592 million over the next two months.
The dollar was trading at US76.26 cents at 4.30 pm.