On June 11th the RBNZ intervened in the NZ$ by selling NZ$ around the US$0.7660 level in thin markets. This was followed up by another bout or two resulting in short term sell offs to US$0.76.

This action has create a fair bit of comment most of it apoplectic in nature focusing on the poor NZ central bank against the might of global speculators. The commentary uniformly blasted the RB and trotted out the story of how George Soros buried the Bank of England back in 1992.

Well this is one time i can say “i was there” as i was actually trading Stg at the time, with the regular trader lying on a beach in the Carribean. It was a crazy time to be in the markets but when you were the focal point of action that feeling was magnified. The Bank of England phone line was running hot as we called up to sell more and more Stg. The voice on the other end of the phone was resigned to the ship going down.

It duly did. The next day i had my biggest one day loss in 12 years of trading as the market all but disappeared and every customer was looking to trade. I remember my broker took me out to dinner at the casino in Park Lane to recover. Nice.

But the main point of this story is that Stg was way overvalued and stuck in the ERM where it was required under the Maastricht Treaty to keep the Pound above a certain level which was DM2.7780.

So the Old Lady was just doing her job. She wasn’t taking on Soros or the market but just fulfilling legal obligations. Soros made a bet that the UK would have to pull out of the ERM and that was a political action and you can be sure he would have done his homework there.

So it is very different to what we see when the BOJ intervenes in the Yen at 100 or 145 where there is no legal cap but an extreme extension in rates.

The RBNZ action falls into this camp. The NZ$ is appreciating well beyond fundamentals based on the current account deficit, PPP comparisons and problems for the export sector to sell its goods. It is also suffering from carry trade side effects which are causing a huge inflow of short term investment to take advantage of high interest rates.

Its intervention is justified on those grounds. The NZ$ should be trading around US$0.60 which is just above its long term average. Of course currency rates can run way beyond what might be considered justifiable and for some period of time.

The Great Game continues in the global financial markets where the US sells it paper to trading nations such as Japan and now China in return for goods. One day this game may stop and the US$ will go into freefall.

The same could happen to the NZ$. I would say the RBNZ intervention is justified though how effective it is remains to be seen. Jeff Gamlin at the NBR is quite positive on the profit implications and it’s certainly a good long term trade to buy some foreign reserves. They should be selling as much Kiwi as possible!

As it happens intervention usually works if the intervening bank has some justification. Remember currency speculators like to make money. They don’t care whether it’s up or down.

The RBNZ is in a tight spot regardless of what Grant Spencer, the Deputy Governor , says. They will need a bit of luck to get this right and will need to continue intervening if required at higher levels like 78 and 80. I think though they will be safe there as people are starting to feel the pinch of higher rates.

Also yesterday the Japanese Minister of Finance weighed into the fray with some well placed comments. The Japanese are the experts in intervention and jawboning the currency. That shot across the bows should not be ignored.

Tags: bank of england, carry trade, central banks, economics, forex, intervention, japan, markets, new zealand, reserve bank of new zealand