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The currency denomination of New Zealand’s unhedged foreign reserves

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    In July 2007 the Reserve Bank added un-hedged foreign currency assets to its foreign reserves portfolio. This means that some of the Bank’s reserves are now funded directly in New Zealand dollar (NZD)-denominated borrowings as opposed to in foreign currency. When reserves are fully hedged, foreign currency assets are matched with foreign currency liabilities, leaving little net foreign exchange (FX) risk. When reserves are held on an unhedged basis, the level of FX risk is greater and the relative rate of return associated with alternative foreign reserve currencies are more variable. These different properties make the composition of the basket of foreign reserve currencies the Reserve Bank holds more important and requires the development of a strategic FX benchmark to guide the investment of the Bank’s unhedged reserves. This article describes the development and implementation of the Reserve Bank’s new strategic FX benchmark.

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    Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

    Volume (Year): 73 (2010)
    Issue (Month): (September)
    Pages: 37-46

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    Handle: RePEc:nzb:nzbbul:sept2010:4
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    1. Kelly Eckhold, 2010. "The Reserve Bank’s new approach to holding and managing its foreign reserves," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, pages 47-64, June.
    2. Kelly Eckhold & Chris Hunt, 2005. "The Reserve Bank of New Zealand’s new foreign exchange intervention policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 231-41 Bank for International Settlements.
    3. Kelly Eckhold & Chris Hunt, 2005. "The Reserve Bank's new foreign exchange intervention policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 68, March.
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