The New Zealand dollar has reached its tipping point and looks to be heading lower after the Reserve Bank fired a warning shot across the bows of the market this week.
The central bank has long been calling the currency lower, mostly without effect, but it now looks as if it has finally got its way, currency strategists said.
At this week's official cash rate review, Reserve Bank Governor Graeme Wheeler noted - not for the first time - that export prices for some key commodities had fallen, and that these would reduce primary sector incomes over the coming year.
"With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall," Wheeler said.
The foreign exchange market seized on the word "unjustified" - the same word used in June 2007 before a successful intervention by the bank - and aggressively sold the Kiwi down.
The 2007 comment described the exchange rate as "at levels that are both exceptionally high and unjustified on the basis of New Zealand's medium-term fundamentals". A few days later, the bank confirmed it had intervened in the foreign exchange markets.
At Thursday's release, the bank said that after raising the official cash rate by 25 basis points to 3.5 per cent rates would remain on hold "for a period of assessment".
Late yesterday the currency was at US85.78c - down from US87.02c immediately before the Reserve Bank's release on Thursday.
Earlier this month, the Kiwi traded at US88.36c - just six pips below its record post 1985-float high of US88.42c.
Westpac senior market strategist Imre Speizer said the threat of intervention sent the kiwi sharply lower, rather than the bank's comment on interest rates.
Strategists said there had been a sizeable shift in the gravity of the bank's rhetoric.
"They [the Reserve Bank] have clearly put the market on notice that the New Zealand dollar's strength will be met with some sort of policy response," ANZ Bank senior foreign exchange strategist Sam Tuck said.
"It is a pretty firm indication to not push the kiwi dollar any higher and that the next move is probably going to be lower," Tuck said.
As always, the wildcard will remain the US dollar, which has been a big part of the kiwi dollar's recent strength. On that score, the greenback was showing signs of strength after stronger-than-expected labour data this week.
But even if the US dollar reverses recent gains, strategists doubted that it would be enough to drive the kiwi back up to its near post-float highs.
Bearish clouds have been building over the kiwi since early in the year; dairy and log prices have fallen, there have been signs of a levelling out in the housing market, business and consumer confidence has fallen and inflation has been weaker than expected.
On the flipside, strong migration is expected to be supporting for the New Zealand dollar as is employment growth but the latter had not been sufficient to generation inflation wage inflation.
The BNZ has long held the view that the kiwi was in for a downward correction, but does not see they currency going into freefall. The bank expects to see the Kiwi at US80c by the end of the year.APNZ