The surging New Zealand dollar has brought the usual chorus of calls for the Reserve Bank to do something - anything - to shoot down the flying kiwi. At the weekend, the dollar broke through the level at which the bank first intervened in the currency markets in 2007 in an attempt to clip its wings.
Radio New Zealand's economics corespondent Nigel Stirling asks could the central bank try again?
As the major currencies of the world fall from grace, the mighty Kiwi is stepping into their shoes.
Finance Minister Bill English says the the New Zealand dollar is increasingly seen as a safe haven for investors' money, linked as it is to the China-Australia growth story.
The rise in the Kiwi that is a consequence of this new-found appetite for the currency will dent the export-led recovery.
The broad-based strength in the Kiwi is reflected in the Trade Weighted Index (TWI) - the Reserve Bank's preferred measure of the New Zealand dollar's performance.
At the weekend, the New Zealand dollar pushed the TWI past the level at which the Reserve Bank first intervened to bring the dollar down four years ago.
On 11 June 2007, the central bank used powers acquired three years before that to sell the New Zealand dollar. A press release later that day explained the intervention as an effort to bring the currency down from levels it considered "exceptional and unjustified by the economic fundamentals".
It had an instant effect. The TWI fell from a day high of 74.48 on 11 June to close at 73.3. But within weeks, it was back over its pre-intervention level. The central bank followed up with interventions later in 2007 and in 2008.
Were those interventions successful? Perhaps. Traders certainly had one more risk to take into account when buying the New Zealand dollar, which could have gone even higher if the Reserve Bank hadn't fired its shot across the bows of currency traders.
With the dollar flirting with those levels again, is the bank's governor Alan Bollard again getting ready to take aim at speculators?
Bank's unhedged reserves lowest since intervention
A cursory look at the Reserve Bank's balance sheet suggests it could be getting ready for an intervention.
When it intervened in the markets in 2007 and 2008 it took on a big financial risk, selling several billions of New Zealand dollars for foreign currency. It risked big losses on those foreign reserves if the Kiwi had continued to surge.
But as the Kiwi plummeted during the global financial crisis, the bank's financial markets department was able to make hundreds of millions of profits. It was able to make these as it bought back New Zealand dollars for less than it sold them for in 2007 and 2008.
In the process, the bank also reduced its unhedged foreign reserves down to its long-term target of about $2 billion.
The head of Massey University's Centre for Banking Studies, David Tripe, says it could be argued that reserves at these lower levels sets the central bank up to again intervene in the currency markets.
If it intervenes in the markets and sells the Kiwi, then the potential losses it would suffer if the currency continued to rise would be much less than if it had held on to the reserves from the 2007-08 interventions.
But will the bank intervene?
The Reserve Bank must first satisfy itself that specific criteria are met before it will intervene in the currency markets.
Is the currency's value exceptionally high or low? Is that value inconsistent with the actual state of the economy? Is the bank's agreement with Finance Minister to keep inflation between 1 to 3% over the medium term reinforced by intervention? And is any intervention likely to have a material effect on the currency?
Depending on your view of the latest statistics on the New Zealand economy, it could be argued that the grounds for intervention are being satisfied by at least three of these points.
But the major roadblock to any immediate intervention is the last question: Will it have a material effect on the dollar?
The Kiwi is being pushed up by a variety of factors. These include insurance money coming into the country following the Christchurch earthquakes, record government borrowing, and hordes of investors bailing out of US dollar in favour of so-called growth currencies.
Given these circumstances, the Reserve Bank would need to heavily sell the New Zealand dollar to have any hope of budging the exchange rate.
To mount a major sell-off would require the bank to build a large fund of foreign exchange reserves - and that carries the risk of big losses if the currency continues to climb.
That's a big risk when viewed against predictions the Kiwi could yet reach parity with the Greenback.
Late last year - when the Kiwi was worth less than it is now - Reserve Bank Governor Alan Bollard was repeatedly pressed on the chances of intervention and he declined to either rule it out or rule it in.
But one thing was clear from Dr Bollard's comments. The Reserve Bank has been spooked by the recent experience of its international counterparts in Israel, Japan and Switzerland.
Those countries' central banks all recently tried - and failed - to stem the rise of their currencies against a falling US dollar.
Switzerland's central bank is estimated to have accumulated losses of $46 billion as a result of its intervention attempts, and Dr Bollard hasn't been slow to point to this experience when questioned about the chances of New Zealand following suit.
Bank's actions speak louder than words
In recent months, the Reserve Bank has sent two signals which may indicate intervention is off the table for now.
The first was a speech in April to farmers in Ashburton, in which Dr Bollard pointed to the switch to Western diets by increasingly wealthy Asian consumers which he believed would underpin high prices for farm produce for the foreseeable future.
At the same time, he warned that there was every chance the dollar would go up - and stay up - as a result of this permanent shift higher in New Zealand's terms of trade.
A fortnight later, it was revealed that the central bank had taken advantage of a dip in the New Zealand dollar following the devastating Christchurch earthquake on 22 February to sell half a billion dollars of foreign exchange.
That was its single biggest monthly transaction in the currency markets since its intervention in June 2007 and the transaction more or less restored the bank's unhedged foreign exchange reserves back to its long-term target of $2 billion.
Both signals suggest the Reserve Bank sees a risk of the currency heading higher, perhaps even to parity with the Greenback.
The post-quake sell-down was particularly telling. It might, as Massey University's David Tripe has suggested, give the bank more room for future intervention to bring the Kiwi down.
More likely is that the bank was getting its reserves down to a level at which any further strengthening of the Kiwi would minimise the losses it takes on its unhedged reserves, at the same time keeping a prudent amount in reserve so it can protect the Kiwi if the worst came to the worst and the currency fell drastically.
The Reserve Bank is also accountable to the Government for any losses that it makes.
In 2003 the Government handed over $1 billion of fresh equity to the central bank to provide a buffer to possible losses from intervention.
It wouldn't want to have to hand over any more if the bank takes a large position against the Kiwi and it doesn't come off - something Alan Bollard, of all people, will be aware of.
