RBNZ central bank intervention

It has been while since we have seen central bank intervention used a tool to stop exchange rate moves. This policy alternative has been disavowed by many and now is viewed as ineffective except when coordinated with other central bank or with a change in policy. This is highly unusual for the New Zealand central bank which has been a very strict adherent to inflation targeting.

The action was taken to halt the dramatic increase in the NZD. A significant portion of this increase is associated with carry trades. The NZD is one of the high yielders and has seen a dramatic increase relative to the yen which is the financing currency. So far the NZD has stabilized after the initial decline on intervention.

Trend-following stories and empirical evidence suggest that extra profits are made during those periods when central banks intervene. Central banks cannot stop the progress of the markets only slow it. However, in the case of trying to drive down exchange rates, central banks have their printing presses on their side. They can sell all of the RBNZ you want and gain foreign assets.

What will be most notable is whether other central banks start to use intervention as a tool to minimize what they perceive as disruptions to their currencies.