Reserve Bank makes whopper trade to boost its ability to intervene in the currency market during a crisis

Christian Hawkesby at the helm of the Reserve Bank, as it increases its foreign currency intervention capacity to $26.7 billion. Photo / Mark Mitchell

• The Reserve Bank of New Zealand sold $259 million of NZ dollars in March to buy foreign currency assets.
• This increased its foreign currency intervention capacity by $854 million to $26.7 billion.
• The move aims to prepare for potential market crises, though it carries risks of asset value fluctuations.

The Reserve Bank of New Zealand is continuing to buy foreign currency assets to give it more firepower, should it need to intervene in the market during a crisis.

The central bank sold a whopping $259 million of New Zealand dollars in March to buy assets, such as government bonds, linked to other currencies.

The sale marked the second-largest foreign exchange-related transaction (or series of transactions) the Reserve Bank (RBNZ) has engaged in during a month in just over a decade.

It helped lift the RBNZ’s foreign currency intervention capacity by $854m to $26.7 billion.

The bank has been increasing its ability to influence the value of the NZ dollar over the past two years under a framework agreed to by former Finance Minister Grant Robertson.

Accordingly, its foreign currency intervention capacity has more than doubled since mid-2023.

Having enough insurance, if you like, to respond to a foreign exchange crisis is considered prudent for a central bank.

The idea is for intervention to occur in rare and extreme circumstances to either maintain financial stability or help the RBNZ’s Monetary Policy Committee keep inflation in check.

However, owning more assets exposes the RBNZ to the risk of its assets fluctuating in value.

The RBNZ hasn’t told the market how much it ultimately wants to increase its foreign currency intervention capacity by, but has said the process is expected to take some years.

The RBNZ was tight-lipped when the Herald asked it to explain why it made a relatively big move in March.

“The size and composition of the foreign reserves vary over time subject to market conditions. This may include changes to the open FX [foreign exchange] position,” a spokesman for the RBNZ said.

The spokesman pointed to a page on the bank’s website, which explained it tended to sell NZ dollars when the exchange rate was above its estimate of “fair value” and buy NZ dollars when the exchange rate was below fair value.

However, Westpac chief economist Kelly Eckhold, who used to manage the RBNZ’s foreign reserves, noted the NZ dollar wasn’t particularly strong when the RBNZ did its big selloff in March.

Eckhold said this could indicate the RBNZ saw the NZ dollar weakening in the future, perhaps due to the rise in global trade tensions, so wanted to make a trade before then to keep building its foreign reserves.

But he conceded time would tell, noting the volatility in the currency market also clouded the picture somewhat.

Indeed, the NZ dollar ended up appreciating against the US dollar in April, after US President Donald Trump unveiled his “Liberation Day” tariffs.

The RBNZ will publish data on whether it sold or purchased NZ dollars in April to up its intervention capacity on May 28.

Michael Reddell, who also used to manage the RBNZ’s foreign reserves, said the bank’s moves looking ahead might shed more light on its activity in March.

He guessed the move was prompted by the RBNZ’s modelling, rather than by it deciding to ramp up its intervention firepower due to concern over a trade war, for example.

Reddell acknowledged the RBNZ had to be careful about what it said on the matter to prevent currency traders betting against it.

However, he believed the bank could be more transparent.

“It’s one thing not to show your hand, it’s another thing when you’re releasing data with a month-long lag to explain what your thinking was,” Reddell said, noting large sums of public money were at stake.

Indeed, recent history shows expanding the size of the RBNZ’s balance sheet comes with risk.

The value of the bonds the RBNZ bought to support the economy during the pandemic (via a completely different programme to the FX one) ended up plummeting to the extent the Treasury is transferring hundreds of millions of dollars to the RBNZ every month to prevent its books from going into the red.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.