The Reserve Bank has seen a NZ$1.358 billion increase in its so-called 'foreign currency intervention capacity' in the past month.
And while a depreciation in the value of the NZ currency during that month will have had some impact, there's clearly been another genuine rise in the amount available to our central bank should it decide it wishes to intervene in foreign currency markets.
As at the end of July 2024 the foreign currency intervention capacity stood at a new record high of NZ$22.267 billion, up from $16.7 billion in July 2023 and up from around $13 billion just a month before that.
Early in 2023 the RBNZ announced that - in effect it would be building up a war chest of foreign currency in the event that it needs to intervene in the foreign exchange markets.
The central bank indicated that the amount it had available would be rising in future months. But it gave no indication of by how much this would be, or what the ultimate size of a war chest might be, or when that might be accomplished.
In the meantime we can only watch month by month and see how big the amount gets. The amount is now considerable by New Zealand standard - but still a relative drop in the ocean in global financial markets.
In a speech last year RBNZ Assistant Governor Karen Silk said there was no clear answer to the question of what the right level of foreign currency reserves the Reserve Bank (RBNZ) should hold.
"We will not be commenting on the target level of reserves agreed as that information is considered market sensitive but will note that achieving it is a process that will occur over a number of years. This is because we seek to avoid undue risk to market liquidity from our actions in reaching agreed levels," Silk said.
Silk explained in her speech some of the ways in which the foreign currency holdings are increased:
"Unhedged reserves are raised by selling NZD in exchange for foreign currency in the spot foreign exchange market. This transaction results in us owning foreign currency, and the value of these assets will fluctuate in line with increases or decreases in the exchange rate," said Silk.
"The hedged reserves are raised by lending NZD in exchange for foreign currency, generally in the cross-currency basis swap market. We effectively borrow foreign currency under long term contracts and are not exposed to movements in the exchange rate, because all the foreign exchange rates are agreed at the start of the contract."
The RBNZ describes the foreign currency intervention capacity as foreign currency assets that are readily liquefiable less foreign currency liabilities that fall due in the next 12 months.
Various other pieces of background on this issue are available in this article.
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