Playing In The Currency Markets With A Peashooter

June 18, 2007

Here are some links about the RBNZ’s intervention in the currency markets. I especially like the comparison of RBNZ’s efforts and that of a peashooter made by The Economist.

Economist – A warning shot

CONFRONTED by a growing army of speculators, on June 11th the Reserve Bank of New Zealand decided enough was enough—and let rip with the peashooter.


Most nations with strong currencies should refrain from following its lead. After all, peashooters are of little use against a determined foe.

But The Lex Column (subscription required) in the Financial Times makes the point that currency intervention is meant to work in one of three ways.

  1. Directly affecting the supply and demand of the currency.
  2. Hinting at future monetary policy.
  3. Signaling that the currency is out of whack.

The column rightly points out that only the last two have any real chance of working. If the RBNZ is determined to defend the currency at a specific level then there are “players” in the foreign exchange market with far deeper pocket than the RBNZ. But this YahooXtra article states the RBNZ will not attempt to defend a particular level for the kiwi.

If the “exchange rate is exceptional and unjustified in terms of the economic fundamentals” to borrow the words of Allan Bollard then as the Lex Column says, it may turn out to be a good punt by the RBNZ.

Other coverage:

Tom Scott - Currency Intervention