Tuesday, 26 August 2014

But what is the point?

From the TVNZ website we learn that
The New Zealand dollar dropped sharply in mid morning trade today, shedding half a US cent in about five minutes and prompting speculation of Reserve Bank intervention.

The kiwi fell, from 9:15am when it was trading at 83.96 US cents, to 83.40 US cents at 9:21am. The local currency subsequently touched a six-month low of 83.36 US cents and was recently trading at 83.44 cents.
Let us assume that it is intervention by the RB that caused this, What is the point? As soon as the intervention stops the dollar will go back to where it began, assuming other factors haven't changed. And if other factors have changed to bring the dollar down, there seems no point to any intervention. To keep the dollar "low" the RB would have to keep on intervening and it can't do that, so what does the RB get for its effort?

The TVNZ article goes on to say,
New Zealand's Reserve Bank has previously said the local currency is too high and raised the possibility it could intervene in the market by selling kiwi in an attempt to push it down.
Which brings us back to the old question of what does "high" or "low" even mean? After all the exchange rate is just the price of foreign exchange and like all freely determined prices, they are what they are. "High" or "low" has little meaning.


Donal Curtin said...

The only half-way decent argument for intervention is that it is a signalling device. A central bank, for whatever reason, is signalling that it would prefer the exchange rate somewhere else, and preferences backed with $ carry more weight than pure jawboning. I agree with you on the rest of it (little or no chance of permanent direct impact), and it can actually be counter-productive. A central bank can end up in the position of being a bookmaker still accepting bets on a foregone conclusion (the BoE and Soros being the prime example)

Donal Curtin said...

The exchange rate is what it is - quite. It's where we've ended up when buyers and sellers of goods, services and investments have done their stuff. The "high" and "low" mostly tends to be from the perspective of the subset of buyers and sellers of goods and services, relative to some PPP benchmark. It's a bit like commentary on interest rates, where you mostly hear from the perspective of borrowers when rates are "high"