Reserve Bank of New Zealand announces changes to FX management

http://www.rbnz.govt.nz/news/2007/3065318.html

Date 13 July 2007

The Reserve Bank today announced changes to its financing and management of New Zealand’s foreign currency reserves.

The moves arise from a review of the Bank’s balance sheet, announced in its Statement of Intent in June 2006. The review was aimed at enabling the Bank to manage its balance sheet to best meet monetary policy, currency, liquidity management and foreign reserves requirements.

Reserve Bank Governor Alan Bollard said that for the last 20 years, the Bank’s foreign currency assets have been fully matched by foreign currency liabilities.

“That was an unusual approach by international standards and we are now moving in the direction of a more conventional approach,” Dr Bollard said. [...]

“However, such transactions will allow the Bank to give concrete signals regarding the extent to which the exchange rate is seen as over- or under-valued. That may indirectly affect the exchange rate by discouraging speculators from pushing the currency to extreme levels.”

Policy shift, Mr. Bollard ? Ha, ha, ha....

 

Japanese Housewives - 1, RBNZ - 0

 

This is also a very interesting part to read ( from Balance Sheet Review Q and A at http://www.rbnz.govt.nz/finmarkets/foreignreserves/3064904.html)

13. How will the new policy affect the Bank’s P&L and dividend to Government?

All FX gains and losses on foreign reserves will be recorded in the Bank’s Profit and Loss account. The Bank’s equity of approximately $1400 million provides a buffer against such movements. While FX gains and losses will not impact normal dividends to government, dividends will be impacted by an expected reduction in average net interest income, reflecting the higher cost of NZ dollar funding. It is intended that any realised gains on FX positions over time will be reflected in increased dividends to the Government over the medium to long term.

Pretty optimistic point of view...

 

The score you oughta be following is CHOOD vs Japanese housewives.

If all those Nippon fx retailers catering to the housewives are not typical bucketshops, they will be buying wholesale the long USD/long other-yielding currency (kiwi, aussie) positions they retail to their customers. If so, the crowded door becomes more crowded. Why? I doubt those retailers want to hold losers greater than margin when, to collect the deficiency, they'd have to garnish Mrs. Wantanabe's sewing circle. That supposes that the retailers actually take positions in the market dollar for dollar of their customers.

Watch the kiwi dive on CME when the crowded door materializes -- I'll let you know just in time. The kiwi volume has picked up just enough to interest me.

 

Now is "just in time."

Although the drop in the USD looks like a runaway train, it isn't, particularly not when the YEN strengthens and US equities fall, which is my forecast.

 

For the homegamers:

Kiwi short call overnight (above) promptly produced small equity of 20 ticks or so, in too-thin-to-win volumes. Anyway, kiwi has climbed back to flat terrain. Still need YEN strengthening to fill out the daily double. USA equities tanking, correctly called, is the first leg. If YEN cash trades down to 120 with conviction, short kiwi could look like a 200-tick winner in a flash.

 

Am watching quietly, Chood. Let's see you do that voodoo you do so well.

 

Ivanovich,

How many ticks do you want, the whole 200? If so, you may have to wait a couple of days. Half that you probably can get about seven hours from now. That's the best I can do on short notice.

Wonder how you say Pawn Shop in Japanese?

 

Not too shabby. Kiwi has traded down since my call 2 nights ago (my first ever in the currency), by as much as 80 CME ticks (give or take a few, but still not quite the 100 I promised Ivanovich). Still well down. It’s weak tonight apparently because of Gov. Bollard’s jawboning, which is curious to say the least. The cash even could trade down to 79 before this Friday, not far from the 200 futures ticks I mentioned before.

If Bollard in fact talks the kiwi down, that would confirm what I would have thought very unlikely, which is that housewives and other amateurs actually account for much of the price action in the currency. Probably a good reason to stay out of it.

In my book, jokes aside, because YEN apparently is regaining or holding form, namely weak vs USDollar, the kiwi oughta still be climbing. The jawboning should be no more than red meat to pros. But it’s a full cent from its CME high, reached 2 nights ago.