In retrospect: RBNZ’s support of financial market functioning at the onset of COVID-19

The onset of the COVID-19 pandemic triggered a rapid deterioration in global and domestic financial market conditions in March and April 2020. This Bulletin draws on data and interviews with participants in New Zealand dollar financial markets to:

provide an outline of what drove dysfunction in key financial markets and
analyse the facilities and operations deployed by us to support market functioning.

We document how the functioning of key NZ dollar financial markets deteriorated in March and April 2020. In the NZD/USD foreign exchange (FX) swap market, a sharp appreciation of the US dollar triggered a deterioration in market liquidity in March 2020, causing borrowing costs in this market to surge. In the secondary market for nominal New Zealand Government Bonds, intermediation constraints and market risk limits contributed to a breakdown in liquidity during the dash for cash, impeding price discovery and making it difficult to execute trades between buyers and sellers of bonds.

Our research indicates that our actions to support market functioning in March and April 2020 were timely and effective, particularly given the rapid deterioration in financial market conditions during this period. We were able to return liquidity to the NZD/USD FX swap market and to key bond markets in New Zealand, supporting these markets to function more normally. Market participants we interviewed argued the early months of the Large Scale Asset Purchase programme were essential for restoring market functioning during the initial months of the COVID-19 crisis.

Our analysis highlights key observations and next steps that will help to refine the design and deployment of the tools we use to support financial market functioning. This will help to shape the next phase of the Liquidity Management Framework Review that we are currently undertaking.

The authors would like to thank the market participants who agreed to be interviewed for this Bulletin.