Currency Intervention: Kiwis don’t fly (Episode 2)
August 13th, 20092 years seems a long time but feels like yesterday. In that period the NZ$ fell from 0.82 to 0.49 and now is back trading just below 0.68. Wow…talk about currency whiplash.
So back then I suggested the RBNZ should think about selling as much NZ$ as they could. Why? Why go against prevailing market sentiment which is that intervention doesn’t really work and simply provides a target for the speculating hordes which incidentally account for 95% of the volume of daily trades.
That’s a fair sentiment when your currency is falling but when it’s rising? And when you have an eye popping foreign debt of almost 140% of GDP……that’s foreign debt not overall debt.
And yet the punters keep buying the NZ$. Perhaps they know something I don’t. Maybe 50 years worth of oil has been discovered in the Southern Basin. Who knows?
The point is that at some point that money has to be paid back and at the moment, due to the sneaky monster that is compound interest, we can’t even get close to reducing it.
But now is the time to strike.
Again I would like to suggest that the RBNZ starts selling NZ$. When you have a lot of something to sell it’s always best to do it when others are keen to buy. Now is that chance.
By selling NZ$ now and paying back, or at least holding for that same purpose, it will take the pressure off the very precarious dependency we have on overseas lenders.
This doesn’t eliminate the debt but simply transfers it to a domestic situation where it can be managed at lower rates and where there is no threat of having to suddenly repay.
How can the RBNZ do this? Again this is very simple. Print NZ$ and buy US$. There is no change to the actual money supply just how the debt is denominated.
Considering the implosion Iceland experienced and the unfolding disaster that is Ireland (surviving only due to its membership of the Euro), it makes complete sense just to get on with this now.
To allow foreign debt to be run at such a level is financial mismanagement of the highest level.
It also shows a willingness to be dictated to and dependent on overseas interests. This makes no sense at all when the country’s economy security is at stake.
Tags: bollard, borrowing, credit crunch, currencies, debt, dollar, financial crisis, fx, Iceland, intervention, ireland, kiwis, money, new zealand, nz$, rbnz, reserve bank of new zealand, security
September 10th, 2009 at 8:47 pm
Hi Raf,
That’s certainly an interesting idea. I’m not sure I understand why there isn’t a change in the money supply. Surely M1 is increased there will be extra NZ dollars sitting in an FX traders call account that didn’t exist before.
I also don’t understand why NZ’s debt will change if the NZ government starts buying US$. Wouldn’t that only change if the NZ government started funding the banks through quantitative easing?
Also do you have any examples where this has been tried in the past and what the concequences were?
Neil.
September 10th, 2009 at 10:04 pm
Hi Neil,
No I don’t have any research to show this has been done before. However, the Bank of Japan (BOJ) have been running an interventionist policy for years on both sides of the currency range. They have printed so many Yen that it’s hard to calculate the numbers.
It’s important to note that this proposal is not specifically about weakening the NZ$ though when we look at the Terms of Trade numbers yesterday (-9.0%), we are in serious trouble on the trade front.
This is about an opportunity, whilst the NZ$ is in demand, to gather $ reserves (which is what most of our overseas debt is denominated in) and then use that as a pool to pay back overseas debt.
In terms of the impact on the money supply the net effect is designed to be zero. It’s simply a huge currency swap, designed to domesticate our debt.
So the intervention would be sterilised in that respect. We haven’t quite reached the QE point yet but that may come further down the track.
September 14th, 2009 at 2:00 am
Hi Raf,
Still not sure you’ve explained yourself clearly. As far as i know the reserve bank doesn’t have much foreign denominated debt, this is largely held by private banks. In fact the reserve bank has a net “long” exposure to foreign currencies of $3.8B as of July(http://www.rbnz.govt.nz/statistics/rbnz/f5/data.html)
Are you talking about selling the NZ$ high and then buying it back low, i.e. speculating? I suppose once the deal is closed out then there would be no increase in supply, and assuming the trade makes a profit we should have that profit to help domestic funding. However while you hold the trade open (i.e. hold US dollars) it will be increasing the money supply, the NZ$ have to come from somewhere. Not sure how it would impact inflation. Plus it’s a bit hedge fund like for a Reserve bank isn’t it?
Is this similar to what China do to hold the Yuan down?
P.S. If you want to domesticate the debt the central bank can just lend directly to banks, but that definately increases the money supply.
There really isn’t a way to “domesticate debt” if we spend more than we earn. You either create more money or borrow overseas.
Thoughts?
Neil.