NZ dollar's sharp decline raises speculation of Reserve Bank intervention

Monday 25th August 2014

The New Zealand dollar dropped sharply in mid morning trade on Monday, 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.

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. Traders speculated today's sharp drop could have been caused by the central bank taking advantage of thin liquidity on a Monday morning, following a meeting of central bankers at Jackson Hole in the US at the weekend which strengthened the US dollar. However, the currency's move could also be attributed to a large options or hedging transaction by a trading bank.

"It dropped hard and fast," said Michael Johnston, a senior trader at HiFX. "It certainly had the hallmarks of something the Reserve Bank could do, it ticks a few of their boxes to justify intervention. They want to intervene when they have maximum market impact. I think Monday morning when no one else is in and liquidity is pretty thin, particularly after a Jackson Hole where they are less dovish on the US economy, so that's at the margin good for the US dollar as well so it's pulling the kiwi in the direction that they want it to go to."

However HiFX's Johnston said the rumours circulating in the market about intervention were unconfirmed and the drop could also be the result of a large currency flow as a result of an options structure being hedged by a trading bank.

"It's certainly not gospel," he said. "If not, then somebody is doing them a favour. If you wanted to move the kiwi, Monday morning is certainly a pretty good time. It's quite an opportune time to have maximum bang for your buck."

The Reserve Bank doesn't comment outside of its monthly disclosure on foreign currency assets and liabilities, spokesman Angus Barclay said. On Thursday, the bank is scheduled to publish its data for July.

BusinessDesk.co.nz

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