Wheeler said the level of the exchange rate was unjustified when it is inconsistent with the economic factors that typically explain its movement during the business cycle.
It was unsustainable when it deviated from its long-run equilibrium level, where it would be expected to settle when business cycle factors have fully dissipated, he said.
"The bank's analysis indicates that the real exchange rate is well above its sustainable level, and also above levels justified by short-term business cycle factors," Wheeler said.
"Unjustified and unsustainable are important considerations in assessing whether exchange rate intervention is feasible," he said.
"Another consideration is whether conditions in the foreign exchange markets are conducive to intervention having an impact on the exchange rate," he said.
He said the real exchange rate has not adjusted materially to the recent downward movement in commodity prices.
For example, global dairy prices have fallen by 45 per cent since February 2014. Despite this, in August, New Zealand's real effective exchange rate was 1 per cent higher than its February 2014 level, he said.
Wheeler said that past experience suggested that, when the New Zealand dollar begins declining from an unjustified and unsustainable level, "the ultimate adjustment can be large".
Imre Speizer, Westpac Banking Corp NZ senior market strategist, said the local dollar could test its big support level at 80 US cents, a level it hasn't fallen below since September 2013.
"It's clearly a very strong talking down of the currency," Speizer said. "It is yet another intervention threat. We have had three, we have had the July meeting, we have had the September MPS and we have had this."
"The currency has fallen a bit over the last few weeks, so clearly it's telling us that the currency even here is still too high, giving us a reminder it doesn't like it and giving us another intervention warning," he said.
Read the full Reserve Bank of New Zealand statement here:
- with BusinessDesk
