Turnover in the NZD as a share of global FX turnover has decreased over the crisis, driven by the decline in risk appetite and lower New Zealand interest rates.
The share of FX transactions conducted in the NZD has fallen, while turnover in the Australian dollar has continued to increase.
Despite this, the level of margin trading in the NZD has remained very subdued.
This saw increasing investment in the NZD as traders searched for yield and showed a strong preference for higher-yielding currencies.
The main purpose of the Reserve Bank's reserves is to make available foreign exchange for FX intervention purposes in the event of dysfunction in the NZD FX market --perhaps due to some NZ specific shock (for example, an earthquake or disease outbreak) or perhaps due to some kind of global financial shock.
The Bank could either resell NZD and repurchase FX after the FX crisis has passed, or refinance maturing FX loans with new long-term FX loans.
* Fund with NZD--The Reserve Bank has ready access to NZD as it is the New Zealand central Reserve Bank.
In normal times, funding reserves with FX liabilities leaves the Reserve Bank hedged against movements in the NZD against the currencies in its foreign reserves portfolio.
To a large extent, the NZD's moves against other major currencies have been driven substantially by the moves in fundamentals of the other economy or by shifts in risk appetite, rather than domestic factors in New Zealand (figure 3).
The moves in the NZD over the crisis period have also been partially driven by changes in liquidity and the dynamics of different market participants in the NZD market.
According to this measure, turnover volumes in the NZD market declined by around 30 percent over the crisis period, compared to the typical volumes seen over 2005-07 (figure 5).
While many of the major NZD market investors still trade the NZD, contacts report that their trade volumes have significantly diminished compared to pre-crisis levels.