What was so good about it you might ask? Firstly we must understand what so many other central banks have done so terribly wrong in the past... they have committed one major and vital mistake:
They placed a big trade against the current direction.
This means that they either:
a) Sold heavily into a currency that was going up (because they wanted it to go down) or;
b) Bought heavily into a currency that was going down (because they wanted it to go up).
JK did it differently, he held off selling great volumes of NZD/USD for a long time while it was going up, almost certainly because he had seen the mistake made by other central banks.
Sure he wanted it lower and said so; he just was not silly enough to try swimming against the tide. So simple to do, yet so smart and patient at the same time. It took a huge amount of patience to wait for this opportune moment.
And that's not all, there was a lot more to the intervention trade from the Reserve Bank, most of which is assumed to have taken place on the morning of Monday 25th August. Prior to this trade triggering, NZD/USD was trading at 84c. Today it is trading below 80c.
I speak often of how a 'good trade' is a combination of multiple factors combined together to stack the odds in the trades favour. Selling New Zealand dollars when NZD/USD was already in decline was a great ingredient but on its own, still just one ingredient. You cannot bake a chocolate cake with a cup of sugar!
The combined trade ingredients (the ones I can see) ultimately looked like this:
1. NZD/USD was in a downtrend, meaning the Reserve Bank was trading/selling with the markets underlying momentum.
2. NZ interest rate rises largely completed for the short term - There were no major expectations of rate rises left in the short term to keep traders bullish.
3. US interest rate rises on the horizon, potentially sooner than another NZ rate rise.
4. The US dollar in a strong uptrend - quite unusual in the last 10 years during which time US dollars have generally weakened.
5. Large trade placed - much larger than the buy orders in the market at the time i.e. the sell trade placed by JK or the Reserve Ban was significantly bigger than any buy orders that would be filled on the other side of the trade.
6. The trade was placed at the time of lowest liquidity and lowest level of monitoring around the world - Monday morning NZ time. The markets in New Zealand had just opened, the UK and Asia were fast asleep and it was still Sunday night in the USA. The biggest traders and the biggest banks were all napping while the Reserve Bank went to work.
7. Show the world that the Reserve Bank means business - all it took was this one trade, this one piece of intervention. It showed that the Reserve Bank is not all words and no action. They are prepared to take decisive action. Even better, these seven steps showed the world they were particularly smart about it.
Such an elegant trade certainly hints of our beloved PM going back to his trading days however we will never know and I can only speculate. I for one however am very impressed by the skill of the trade execution.
The exporters who have complained above 80c should rejoice now with any exchange rate that starts with a '7'. If they are lucky enough and the US raises interest rates before ours, we might even see an exchange rate starting with a '6' in 2015.
Exporters who complained about high rates should now give JK a thank you and a pat on the back.
What will the Reserve Bank and JK do next?
If anyone knew that then we would have probably seen the first trade coming too. It was so simple and yet so genius that we could have almost missed it. The next step may be similar or it may take us by surprise again with a new genius currency trade.
One thing I know for sure is that whether it is JK pulling the strings or not, there are smart minds at work in the NZ currency market. I watch the NZ dollar with bated breath.
Nick McDonald is a New Zealander teaching everyday people how to trade the worlds markets via his company Trade With Precision.
