Forum Archive Index - February 2004

["Baa Baa" <baa_baa@hotmail.com>]

>From the RBNZ website,

Policy Targets Agreement 2002 - 
http://www.rbnz.govt.nz/monpol/pta/0124848.html
What is the Policy Targets Agreement? - 
http://www.rbnz.govt.nz/monpol/pta/0127027.html

This is about "price stability". There is reference to (the Bank) "shall 
seek to avoid unnecessary instability in output, interest rates ** and the 
exchange rate.** "

This is from the indicator of the CPI and within the intermediate term 
(timeframe) of the policy objectives, of the objective to maintain inflation 
within 1%-3%, achieved by interest rate manipulation. (too blunt imo).

What then are the 'instruments' (outside of interest rates) can the RBNZ 
draw upon, if instructed by Cullen, to affect the foriegn exchange rate. 
[i.e. does anything exist outside of interest rate manipulations?] ... 
again, from the RBNZ website 
http://www.rbnz.govt.nz/research/bulletin/1997_2001/1998Dec61_4ArcherHalliday.pdf
 
"Historically, most countries have held foreign currency reserves in support 
of exchange rate policy. Most often reserves are used to intervene directly 
in foreign exchange markets to influence exchange rates. In contrast, since 
New Zealand's currency float in March 1995, our monetary policy approach has 
eschewed direct foreign exchange market intervention targeted at the level 
of the exchange rate. NONETHELESS, the Reserve Bank's empowering legislation 
enables the Treasurer to direct the Bank to intervene in the foreign 
exchange market, and also establishes the Bank's obligation to hold reserves 
to provide the capacity to implement such a directive. Accordingly, the Bank 
holds around the equivalent of NZD 4 to 5 billion in foreign currency assets 
... predominantly US, GB, Japan ..." etc.

So... what this says is, that if Cullen directs the RBNZ to intervene, then 
the RBNZ has 4-5B to play with, but ... in order to drive down the NZD rate 
(against US), NZ would have to BUY US$, so perhaps re-weight the overall 
reserves bucket. In any regard, 4-5 billion even if it was ALL available, is 
only a tiny tiny fraction of the total foriegn exchange capital traded 
worldwide -every day-. i.e. it would be completely ineffective. Japan has 
already recently proven and continues to prove that 10's of billions of US$ 
intervention have only minor and temporary effects on the decline of the US 
federal reserve currency.

Therefore ... I repeat again "US$ How low can it go"? Or more importantly 
(selfishly), "NZ$, how high can it go before TSHTF?"

BAA


>From: mixtrader <mixtrader@clear.net.nz>
>Reply-To: sharechat@sharechat.co.nz
>To: sharechat@sharechat.co.nz
>Subject: Re: [sharechat] USD, how low can it go?
>Date: Wed, 18 Feb 2004 13:38:34 +1300
>
>Gary
>
>I agree with your sentiments.  Note, however, that RBNZ has no control over 
>fiscal policy (that is reserved for the more academic pursuits of "Dr. 
>Cullen"), and it only implements monetary policy through the OCR and the 
>reserve contributions required of registered banks.
>
>Obviously, the OCR is one component of Foreign Direct Investment (FDI).  
>The greatest component of obtaining investment from offshore is the 
>prevailing business climate and the returns that investors might expect to 
>receive as a result of pouring money into our small economy.
>
>FDI takes many forms eg from Toll buying into TransRail through to foreign 
>banks lending to NZ companies.  In all cases they do this because they can 
>see a profit for their trouble that exceeds the profit that they could 
>realise from an alternative investment.  Its just like us investing in 
>shares, we try to avoid the dogs and (depending on our investment horizon) 
>look to achieve maximum gain relative to our personal risk aversion.
>
>With a currency floating at market rates, and currency markets being a 
>particularly active component of the global economy, RBNZ has no hope of 
>controlling the "value" of the NZ$ other than through mechanisms which 
>affect returns (ie the OCR).  When they make mistakes, however, such as the 
>recent raising of the OCR in an attempt to curb the "excesses of the 
>housing market" and the pressure that has put on inflation (I believe they 
>acted too soon - the housing bubble had already reached near maximum 
>expansion when the OCR was raised), the overall impact is that the currency 
>increases in value because inflationary outlook is stable and returns to 
>FDI have improved.
>
>A reduction in the OCR probably would have impeded FDI.  On the other hand 
>(a phrase typically attributed to economists), there probably would have 
>been greater investment into the equities sector of the market and the 
>"excess" values of real estate would have been held at around current 
>levels.  In my opinion, the real estate market will lose some value as a 
>result of an increase in the OCR - there will also be some hardship to 
>investors that are excessively leveraged in that market, something that 
>Bollard had been warning about for months prior to the change in the OCR.

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