A resurgent US dollar and more bearish talk from the Reserve Bank combined to drive the New Zealand dollar 2 per cent lower in active trading this morning.
The greenback had spiked higher in the wake of an upbeat message from the US Federal Reserve's Open Market Committee (FOMC), which drove the local currency down by about one US cent to US78.40c early in the morning.
Following a official cash rate review from the Reserve Bank, which kept the rate on hold at 3.5 per cent, the Kiwi dropped further to US77.70c. By 10.15 am the currency had recovered somewhat to US77.98c.
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"The Kiwi was sold on both events - much more so on the FOMC than on the RBNZ, but that's probably because we had such a big reaction from the FOMC," ANZ Bank senior foreign exchange strategist Sam Tuck said.
There was no clear bias from the Reserve Bank as to which direction rates would go. The central bank's comments were slightly more "dovish" than many hand expected, and dealers noted a key feature of the previous announcement in September - "nevertheless, we expect some further policy tightening will be necessary" - was omitted this time.
"This omission will further fuel the skeptics in the market who believe the RBNZ will not tighten any further," Westpac said in a commentary.
The bank's repetition of its previous warning about the exchange rate, to the effect that its level remained "unjustified and unsustainable" added to the selling pressure.
"We expect some stability at around 0.7800, given its large FOMC-induced fall earlier, but during the days ahead it risks falling towards 0.7709 major support," Westpac said in a commentary.
Looking ahead, the Reserve Bank will this afternoon release foreign transactions data for September, which is expected to show whether the bank was again intervening after it sold August's $521mn net sale in August.
"Anything close to matching that figure will keep downward pressure on NZ dollar," the Bank of New Zealand said. "But a halt in selling activity would likely provide some support, if not provoke a mild - but misplaced - rally," the bank said.