The New Zealand dollar fell after Reserve Bank governor Graeme Wheeler said yesterday he is prepared to keep intervening in foreign exchange markets to limit the rise of the local currency.
The kiwi fell as low as 80.03 US cents, from 81.15 cents at 5pm yesterday, and recently traded at 80.76 cents. The trade-weighted index slipped to 75.89 from 76.41 yesterday.
Wheeler said the currency is significantly overvalued and he is prepared to "scale up" currency intervention should he see opportunities to have a greater influence. The central bank published figures yesterday showing it sold a net $256 million last month, its biggest monthly sale in five years, having previously signalled it has been intervening in currency markets in a bid to take the top off rallies.
"The Reserve Bank has shown very good timing and just given the New Zealand dollar no more than a nudge in the right direction and it's also generated some doubt in some areas that they could be more forceful if necessary," said Peter Cavanaugh, client advisor at Bancorp Treasury Services.
"The markets have taken notice of the Reserve Bank's actions. They have done something and they are prepared to do some more."
The New Zealand dollar rose as high as 86.77 US cents in April, and has shed 6.9 per cent since then on expectations the Federal Reserve will start tapering off its US$85 billion a month asset purchase programme on signs the world's largest economy is recovering.
"For now the markets have much bigger concerns. It's a big world they are taking on," said Bancorp's Cavanaugh. "The only certainty in the short term is volatility and uncertainty."
Underpinning the local currency is the expectation New Zealand's 2.5 per cent benchmark interest rate is set to rise, increasing the yield of the nation's assets.
Traders expect 22 basis points of hikes to the benchmark rate over the next 12 months, based on the Overnight Index Swap curve. That has weakened from 29 basis points yesterday.
"The New Zealand dollar is overvalued but it's there for a very good reason," Cavanaugh said. "It could well stay overvalued for some time."
Traders will be eyeing reports out in New Zealand today for indications of how the economy is tracking.
A report today on terms of trade, a measure of how much imports can be funded by a set amount of exports, will likely show growth of 1.5 per cent in the first quarter, from a negative 1.3 per cent in the fourth quarter, according to a poll of seven by Reuters.
Meanwhile an ANZ New Zealand business outlook survey is expected to show continued strength.
The local currency dropped to 83.54 Australian cents from 83.76 yesterday. It slipped to 81.37 yen from 81.89 yen, and declined to 61.91 euro cents from 62.59 cents. It slid to 53.03 British pence from 53.57 pence.