The outbreak 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 overview of what caused dysfunction in key financial markets
- Analyze the facilities and processes we use to support the functioning of the market.
We document how the functioning of key New Zealand dollar financial markets deteriorated in March and April 2020. In the NZD/USD foreign exchange swap market, a sharp appreciation of the US dollar in March 2020 triggered a deterioration in market liquidity, causing borrowing costs in this market to rise sharply. In the secondary market for nominal New Zealand government bonds, intermediation restrictions and market risk limits contributed to a collapse in liquidity during the monetary peak, hampering price discovery and making trades between bond buyers and sellers more difficult to complete.
Our research shows that our actions to support market function in March and April 2020 were timely and effective, particularly given the rapid deterioration in financial market conditions during this period. We have been able to return liquidity to the NZD/USD FX swap market and major bond markets in New Zealand, helping these markets function more normally. Market participants we interviewed argued that the first few months of the large-scale asset purchase program were critical to restoring market function in the early months of the COVID-19 crisis.
Our analysis highlights key observations and next steps that will help refine the design and deployment of the tools we use to support the functioning of financial markets. This will help shape the next phase of the liquidity management framework review we are currently undertaking.
The authors would like to thank the market participants who agreed to be interviewed for this bulletin.
More information
Download the bulletin: Review: The RBNZ's support for the functioning of financial markets at the start of COVID-19 (PDF, 1.6MB)
Financial markets
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