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NOV 10

Successful export economies manage their currency

In a world of currency manipulation in other countries the argument that we can do nothing with our currency is disingenuous at best. The simple fact is our politicians and Reserve Bank officials are choosing to do nothing. That choice threatens our very future as that future is built around export success, not just export success in the sale of dairy products, but export success across the board.

A distinction must be made between currency intervention at the top and bottom of the exchange rate cycle. Bill English commented earlier this week that New Zealand would need $200 billion US ‘in the bank’ to effectively manage the exchange rate; extensive currency reserves are only really needed to hold up the value of a currency. The fact is there is no limit to the intervention possible if it is aimed at devaluing the currency. Selling New Zealand dollars to foreigners expands our foreign currency reserves and we should make money if successful. Intervention aimed at holding up the value of the currency is limited by foreign currency holdings; that should not be used as a justification for not intervening at the top.

This quote from Business and Economic Research Limited’s October Monthly Monitor sums up the situation:

“On the grounds that New Zealand is too small to move ‘the market’, our authorities have traditionally opposed intervention notwithstanding the fact that sterilised intervention is a long established concept in finance literature and widely implemented around the world. Of course, it can run into trouble when authorities are trying to maintain an over-valued exchange rate, without adequate foreign currency reserves with which to intervene. But when the intervention is to prevent over-valuation, the only limit is the supply of a central bank’s own currency. This is not a problem for a truly independent central bank that is not facing inflationary pressures. When countries as small as Mauritius are intervening to stabilise their exchange rate and are being complimented on it by the IMF, one wonders why the New Zealand authorities think it is beyond them.”

The issue here is the potential inflationary impact and the ability of inflation control mechanisms, fiscal and monetary, to deal with that impact. This argument gets back to the inability of current monetary and fiscal policy instruments to deal with domestic inflation.


Earlier this decade monetary policy failed to restrain inflation in the non-traded economy, the OCR response simply attracted yet more speculative money into New Zealand and that money fuelled our domestic asset bubble – it was easier to borrow the money than earn it and the policy tools chosen did nothing to restrain inflation in the domestic economy. On the other hand, the ever higher OCR succeeded in lifting the exchange rate, killing exporters and lowering the cost of imports, so at a headline level inflation was within the RBNZ’s policy band.

We can do better.


A quick look at the performance of the Monetary Authority of Singapore demonstrates that it is as much about what we choose to do as it is about what others choose to do. There is no doubt that there will be a cost involved, but doing nothing and simply letting our exporters suffer is a much higher cost that we cannot sustain.

We can do nothing about gravity; monetary and fiscal policy is not an immutable, it is a matter of choice. Singapore has recognised it is an export dependent economy and has strategically aligned its policy and institutions behind that export dependence; New Zealand policy makers have chosen to bias the economy towards consumption and debt.

That makes a mockery of the talk around economic rebalancing, job expansion and an export led recovery.

tags: managed currency, exchange rate, intervention
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