July 26 2017, updated 5:00am

Reserve Bank eyes markets as kiwi plunges

Last updated 00:00 16/08/2007

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As the meltdown continued on financial markets, the Reserve Bank today switched from its "business as usual" stance to "monitoring developments in financial markets closely".

Although the statement was unusual, analysts said it was not a signal the central bank is about to soften its tight monetary stance.

Acting governor Grant Spencer said following "recent disruptions in global credit markets, the Reserve Bank has been closely monitoring the impact on the domestic markets and liquidity conditions".

The bank said it considered there was adequate cash in the system but it was ready to inject more if needed.

The New Zealand dollar continued its plunge today as financial markets around the world steered away from risk. The kiwi dropped smashed one psychological barrier after another – first dropping below US70c and within hours dropping below US69c.

It has dropped 15 per cent since hitting a peak of US81.1c on July 24 and traders said there was no reason to buy even given its plunge.

The news was less dramatic on the sharemarket, but it still fell another 1.4 per cent and has crashed more than 8 per cent in three weeks.

Local dealers said every other bank in the world had been out trying to calm markets and today the RB belatedly had joined the pack.

BNZ currency strategist Danica Hampton said the bank's statement was not a monetary signal. It was simply emphasising it would be a lender of last resort if pressure was exerted on the banking system.

Some eyebrows were raised last week when the bank did not put out such a statement when every other central bank did.

Ms Hampton said the RB and other central banks were not interested in bailing out financial institutions from poor credit decisions.

"Their interest is only about providing liquidity to the market. It's about the quantity of money, not the price. All of the cash that has been pumped in by central banks has been at or above the target cash rate.

"They are not easing monetary policy."

She said the US Federal Reserve had made it clear in the past that it did not respond to asset bubbles, whether shares or houses.

Ms Hampton said there were a number of financial institutions holding low rated asset-backed paper and they needed to decide whether to sell and realise the loss or finance it at a loss as borrowing costs rose.

"People have to live with the credit decisions they have made and central banks are not going to bail them out."

However, an Auckland trader disagreed. He said as the crisis widened, it was more likely the Fed would intervene.

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"The more it goes, the more likely it is that the Fed will have to do something. The bigger the mess, the more likely the central banks come in to calm things."

And he said if the Fed went, then every other central bank would follow including the Reserve Bank.

Ms Hampton felt the New Zealand dollar could continue to fall.

She said this month there were $3.6 billion of eurokiwi and uridashi bonds – foreign held securities denominated in New Zealand dollars – due to mature this month. The crunch could come on Monday when $2.5 billion was due to mature.


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