The Reserve Bank's foreign cash hoardings have hit a new high in the past month as our central bank continues to build up its ability to intervene in the foreign exchange market towards an unspecified target level.
According to latest monthly figures the RBNZ's so-called 'foreign currency intervention capacity' has now hit a record NZ$26.724 billion - and that's up by $854 million in the month.
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.
The figure's not just about buying and selling Kiwi dollars - it's a bit more complicated than that.
But the RBNZ does directly buy and sell NZ dollars as well and in March it had a net sale of $259 million. That's well below the record monthly sale tally, which was $3.955 billion in July 2023. But apart from that big month, we have to go back to Aug 2014 to find a month in which the RBNZ had a bigger net sale of Kiwi dollars.
For the record, the RBNZ's own foreign exchange records show that during the month of March the Kiwi dollar started the month at 67.24 on the 17-currency Trade Weighted Index, went as high as 68.75 by March 18 and then finished the month at 67.79. Against the American currency the NZ dollar started March at US56.25c, went as high as 58.24c on March 18 and finished the month at US57.1c.
As of Monday this week the Kiwi was at 69.77 on the 17-currency TWI and US59.48c.
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. Intervention is something the RBNZ has only ever done infrequently.
Prior to that announcement in early 2023 the RBNZ was holding around $12 billion worth of foreign currency intervention capacity. This was increased to $18.8 billion by the end of that year, and then to $25.9 billion by the end of 2024. The pattern has been for the capacity to be increased periodically, and by large chunks in one go - such as the over $850 million increase in March.
The RBNZ's given no indication of what its targeted level is - or how long it will take to get there, other than it will take "a number of years". It has indicated there is no clear answer to the question of what the right level of foreign currency reserves the Reserve Bank (RBNZ) should hold.
In previously explaining how it builds up the foreign intervention capacity, the RBNZ has said that 'unhedged reserves' are raised by selling NZD in exchange for foreign currency in the spot foreign exchange market. This transaction results in the RBNZ owning foreign currency, and the value of these assets will fluctuate in line with increases or decreases in the exchange rate.
'Hedged reserves' are raised by lending NZD in exchange for foreign currency, generally in the cross-currency basis swap market. The RBNZ says it effectively 'borrows' foreign currency under long term contracts and is therefore not exposed to movements in the exchange rate, because all the foreign exchange rates are agreed at the start of the contract.
Various other pieces of background on this issue are available in this article.
And Westpac NZ's Kelly Eckhold explains the RBNZ's strategy in this Of Interest podcast.
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