The rationale and justification for the RBNZ intervening directly in the FX markets, selling NZ dollars, has not been well understood and poorly reported in our view. Many described the surprising and sudden intervention as “lunacy” and that the RBNZ would be “dog-tucker” for the offshore hedge funds and currency speculators. Of course the intention of the intervention was not to stop the NZD appreciating, or to defend a particular exchange rate level, or force the NZD down.

The RBNZ well know that such a strategy would be futile and unduly risk taxpayer's money to FX losses. The justification and what finally triggered the intervention action was disorderly and dysfunctional short-term NZD forex markets. Any central bank has a huge vested interest in insuring that the market for their currency is not chaotic or dysfunctional.

It could easily be argued that when the NZD/USD inter-bank market price gapped from 0.7500 to 0.7650 on Friday evening 8th June on virtually nothing (AUD and USD stable) the RBNZ had a responsibility to stop the crazy volatility and restore market order. Further intervention selling at 0.7550 a few days later has left them “short sold Kiwi” at an average entry rate of 0.7600. Time will tell whether us taxpayers come out of this at a profit, but the RBNZ have a considerably longer time horizon than the average NZD carry-trade punter and investment bank proprietary trading desk.

Back in 2004 when the RBNZ organised themselves properly with resources to be able to intervene, a moral hazard was detected in that exporters could erroneously conclude that the RBNZ would take the top off any NZD over-valuation, therefore exporters did not need to hedge currency risk long-term as the RBNZ underwrote that risk. Subsequent NZD strength to 0.7800 has rendered such expectation and reliance by exporters as very unwise.