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The New Zealand dollar was the weakest major currency overnight, touching a fresh six-week low after Reserve Bank governor Graeme Wheeler yesterday signalled conditions were ripe for currency intervention.
The kiwi touched a low of 85.65 US cents overnight, and was trading at 85.76 cents at 8am in Wellington, from 85.82 cents at 5pm yesterday and 87.02 cents immediately before Wheeler's comments at 9am yesterday. The trade-weighted index was little changed at 79.94 from 79.91 yesterday.
Wheeler yesterday raised the official cash rate for a fourth consecutive meeting and signalled that although the hiking bias remained, rates would be on hold for a period of assessment. For foreign exchange traders, Wheeler's comment that the level of the currency was "unjustified", "unsustainable" and had the potential for a "significant fall" signalled he believed the bank's criteria had been met for intervention in the market to drive down the value of the kiwi, which has hovered just under post-float highs. The central bank last used the word "unjustified" in an OCR statement in June 2007, after which it sold the kiwi.
"That word is a pretty powerful word," said Sam Tuck, senior foreign exchange strategist at ANZ Bank New Zealand. "Not saying that they will intervene, but the market is absolutely definitely on notice. The RBNZ choose their words carefully and we believe that the use of 'unjustified' is a clear signal that further New Zealand dollar strength would elicit a policy response. The quite clear intention for the RBNZ is to put the market on notice that they believe that their criteria has been satisfied."
ANZ's Tuck said the kiwi will probably remain under pressure and consolidate around the 85 US cent level, taking direction from future events.
Today, traders will be eyeing the ANZ business confidence survey, scheduled for release at 1pm. Elsewhere, Japanese June inflation, the German IFO business survey for July and UK second quarter GDP are also scheduled for release.
The New Zealand dollar advanced to 91.03 Australian cents from 90.82 cents yesterday, gained to 87.29 yen from 87.08 yen, slipped to 63.70 euro cents from 63.77 cents and edged up to 50.48 British pence from 50.40 pence.