The Reserve Bank is putting its money where its mouth, selling down its holdings of New Zealand dollars last month as governor Graeme Wheeler continues to call the currency overvalued.
The bank sold a net $199 million in December when the trade-weighted index was an average 73.92, adding to the $64 million sold in November, according to Reserve Bank figures published yesterday. That's the biggest monthly sale since mid-2008 when the kiwi dollar plunged going into the global financial crisis.
Wheeler today said the kiwi dollar, which recently traded at 83.59 US cents and 75.17 on a trade-weighted basis, is overvalued and is the main reason inflation is tracking below the bank's target band.
Mike Jones, currency strategist at Bank of New Zealand in Wellington, said the central bank is backing up its heightened rhetoric with some action, and is signalling a TWI at 75 is too high.
"The bank is walking the talk by selling the kiwi dollar a little more aggressively," Jones said.
Since taking the Reserve Bank reins in September last year, Wheeler has criticised the strength of the kiwi dollar, calling it overvalued and saying it's holding back the economic recovery. He has previously ruled out intervening in currency markets, which he says wouldn't have a sustainable influence on the kiwi.
The central bank last intervened in currency markets in 2007 when it sold more than $2 billion to ease the last peak in the kiwi dollar.
The bank manages foreign exchange reserves to allow for efficient intervention and crisis management, and had an intervention capacity of $9.14 billion, as at December 31.
The last major monthly movement in the Reserve Bank's foreign reserves was $525 million of net purchases in March 2011 in the wake of the Canterbury earthquake when then-governor Alan Bollard made an emergency cut to the official cash rate. The TWI was an average 67.72 that month, 11 per cent weaker than the average sale last month.
Jones said the central bank has been running more of its foreign exchange programme unhedged, which is more expensive than running a hedged programme.
"The bank made a whopping big profit in the GFC, but since then, it's been haemorrhaging cash to fund its net short positions," he said. "They're hoping they can smooth the peaks and troughs, and can make some money to offset currency costs."