Monday, June 11, 2007

A very dangerous precedent

For the first time since the dollar was floated back in the early 80's, the Reserve Bank has stepped into the currency markets and sold $NZ. While it seems to have worked, with the dollar retreating 1 cent, it is too soon to tell whether it be enough to stop our helium currency bouncing up again.

There are differences with the 80's. Back then, the NZD was pegged to the USD. Speculators knew that policy meant we had to feed the market to maintain the fiction of parity. This time round, there is no peg. Instead, the RBNZ Governor will only feed the beast when conditions are "exceptional and unjustified in terms of the economic fundamentals." Which, in this case, was US75.25c.

With $7 billion in the bank, Bollard is gambling that this piss in the pond will be enough to dilute the dark currents in the Forex market. If the NZ dollar does bounce back, and judging from current US economic policy this idea isn't too much of a stretch, the Reserve Bank has set the very dangerous precedent. This intervention may set the stage for some very nasty arbitrage. Let's hope the fund sharks don't take the bait.

Must go, am late for an appointment with Tony Soprano.