Expect the unexpected!

After being involved in the markets for almost 20 years I should have learned to expect the unexpected! Perhaps the most surprising financial market event over the March month was the decision of the Reserve Bank of New Zealand (RBNZ) to give itself scope to intervene in the currency markets. However, I think there is more "smoke than fire" on this one, with the likelihood of any intervention being minimal.

The RBNZ knows it has little power to turn the tide in currency movements as evidenced by the futile and expensive intervention of the Japanese authorities with the Yen. While the Yen obviously trades in much greater volumes than the Kiwi it is worth noting that the Bank of Japan has sold over NZ$220billion of Yen this year alone; slightly more than is being allotted to the RBNZ! Even then the effect on the Yen has been negligible and the Bank of Japan appears to be giving up trying to (unsuccessfully) hold down its currency value.

The most disturbing aspect to me is not that the RBNZ is potentially able to bet on movements in the currency markets, but more that it appears to be becoming more politicised. One does wonder about the "under current" of influence in this case for the RBNZ to change its policy. The attitudes of various public bodies such as the RBNZ can, at the very least, be indirectly impacted by the policy position of the Government of the time. In this case Dr Cullen's pre-posturing on currency suggested he would be very receptive to the RBNZ's new stance and so it proved.

Looking at the New Zealand economy unfortunately one thing hasn't changed over the past 20 years. That is, the cycle of export growth fuelling strong domestic demand, which eventually turns into a balance of payments crisis (as the export sector wanes but imports stay strong). And this is the pattern we are seeing again through the latest recovery with the 2003 calendar year current account deficit announced during the month at around $6billion or 4.4% of GDP.