RBNZ today announced that it has sold NZD

RBNZ today announced that it has sold NZD

The RBNZ has recently determined the NZD to be 'unjustified' and 'exceptionally high', effectively ticking two of the four boxes required for FX intervention. Today's announcement that the bank has intervened in the FX market means that now is it must also be consistent with the PTA, and an opportune time to hit the market.

The RBNZ first started turning the market's attention to the possibility of market intervention in April, with the statement that NZD is "unjustified" and "exceptional". At the time NZD was trading at US 0.74 cents. With NZD trading at post-float highs and breaking US 0.76 cents, the RBNZ opportunistically took advantage to sell (see chart).

The RBNZ has the ability to conduct currency intervention in a capacity to meet its objectives outlined in the Policy Targets Agreement (PTA). The PTA requires the RBNZ to maintain price stability while avoiding unnecessary volatility in output, interest rates, and the exchange rate.

Currency intervention is another monetary policy tool in the RBNZ's arsenal, designed at "trimming the peaks and troughs of medium-term fluctuations in the New Zealand dollar (NZD) exchange rate, where there is a misalignment between the exchange rate and its 'fundamentals'."

According to the currency intervention policy, four hurdles must be cleared in order for intervention to be justified.

* The exchange rate must be exceptionally high or low;

* The exchange rate must be unjustified by economic fundamentals;

* Intervention must be consistent with the PTA; and

* Conditions in markets must be opportune and allow intervention a reasonable chance of success.

These conditions have obviously been met...

ENDS

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