Reserve Bank confirms currency intervention

Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell

The Reserve Bank has confirmed it intervened in foreign exchange markets last month in an attempt to push the currency lower without giving any details on the size of its action, having already given a serve to the counter-balancing strength in the housing market earlier today.

"That intervention will not materially change the level of the exchange rate but could take potentially the tops off rallies," governor Graeme Wheeler told Parliament's finance and expenditure select committee. "In terms of activity, there's been an intervention."

The kiwi sank to 83.63 US cents from 84.48 cents before the comments were telegraphed at the committee in Wellington. The trade-weighted index fell to 77.71 from 78.18. The size of the bank's action would show up on its balance sheet, deputy governor Grant Spencer told the same meeting.

Wheeler outlined the criteria for the bank to intervene in a February speech to the New Zealand Manufacturers' and Exporters' Association, saying he would act "when circumstances are right." The central bank last intervened in mid-2007 when it sold a net $2.2 billion over two months.

"The Reserve Bank's MO is to trim peaks and troughs - it's really about slowing the pace of appreciation," said Sue Trinh, currency strategist at RBC Capital Markets in Hong Kong. "It's not particularly surprising, particularly given Wheeler paved the path" with a speech in February.

The comments come after governor Graeme Wheeler said in a briefing for the six-monthly Financial Stability Report today that the currency was "significantly overvalued," while warning the strength in the property market was threatening the country's financial system.

The housing market has become a growing headache for the central bank, as Auckland sale prices hit new record highs in a rapidly heating market, while at the same time a strong currency has limited the bank's ability to stoke lending growth with lower rates.

Wheeler told politicians the bank is concerned about the increasing amount of low-equity residential loans being written by the major lenders, and has been talking to their senior executives and board members about those issues.

RBC's Trinh said the central bank's move to introduce tougher macro-prudential policies to cool the housing market was "de facto tightening" and should lead to a "paring back" in analysts' expectations for New Zealand interest rates.

She said the kiwi should find buyers around 83.75 US cents, with the next support level at 83.50 cents.

The Reserve Bank expects to sign a memorandum of understanding with Finance Minister Bill English shortly to add macro-prudential tools to its interest rate lever in keeping inflation tame and the economy on track.

It stands ready to impose loan-to-value limits on the riskiest mortgage lending should it be deemed a "significant risk" to New Zealand's financial stability, the report said.

The bank manages foreign exchange reserves to allow for efficient intervention and crisis management, and had an intervention capacity of $8.7 billion, as at March 31. It will next update its foreign currency assets and liabilities on May 30.

The RBNZ sold a net $199 million of New Zealand dollars in December in the course of its normal market operations when the trade-weighted index was an average 73.92, adding to the $64 million sold in November, according to Reserve Bank figures. That was the biggest net monthly sale since mid-2008 when the kiwi dollar plunged in the lead-up to the global financial crisis.

The TWI has gained 11 per cent from its lows a year ago, helping keep imported inflation at bay but hurting returns in the tradables sector.