SYDNEY/WELLINGTON: The recent ascent of the New Zealand dollar was rudely interrupted on Wednesday after the country's central bank warned it might intervene to drag it lower, giving the Australian dollar a leg up through key resistance.
The kiwi stumbled half a percent to $0.8689 after Reserve Bank Governor Graeme Wheeler said the bank could sell the currency if it stayed strong in the face of worsening economic fundamentals, such as a further fall in export prices. Wheeler also said the strong kiwi, which is hovering near a post-float high against a basket of currencies, could lower non-tradeable inflation and slow the pace of future rate rises.
"It's very hard to argue that intervention could be consistent with policy when you are hiking rates," BNZ currency strategist Raiko Shareef said. "But it's a very clear signal that the RBNZ firmly believes that the NZ dollar is overvalued and that it should come lower.
It also signals that they're thinking very seriously about pausing their rate hike cycle in June or July." Markets are pricing in an 82 percent chance that the RBNZ will raise rates by 25 basis points to 3.25 percent at its next meeting in June.
The governor's comments came just as the kiwi was hitting its highest since August 2011, at $0.8779, and caught speculators long.
In trade-weighted terms, the kiwi eased to 80.48 from a peak of 81.01.
Also weighing on the kiwi were a fall in global dairy prices and labour figures showing subdued wage pressures, which could lessen the need for the RBNZ to be aggressive with rates.
Market participants said the kiwi would face more selling in the London and New York trading sessions. A break below $0.8667 would take it below short-term trendline support drawn from a low hit in late April, opening the door towards $0.8600, where bids were suspected.
Further losses could also be limited below that level by technical support at $0.8582, the 23.6 percent retracement of its February-April rally.
The Aussie was firm at $0.9345, having risen nearly 1 percent on Tuesday on stop-loss buying after the currency breached the 21-day moving average of $0.9325.
Underpinning the Aussie was the Reserve Bank of Australia appearing resigned to the currency's strength at its monthly policy review.
The central bank kept interest rates steady as expected at a record low of 2.5 percent on Tuesday and reiterated its outlook for a period of steady policy.
Also helping was broad US dollar weakness as the market seems to be coming to the view that the Federal Reserve is still a long way off from raising interest rates.
The Aussie did take a dip on weaker-than-expected retail sales data, but quickly recovered.
Resistance was found around $0.9377/79 with decent buying interest at $0.9325.
New Zealand government bonds rallied, sending yields as much as 3.5 basis points lower. Australian government bond futures rose to multiweek highs, with the three-year bond contract up 2 ticks at 97.140. The 10-year contract gained to 96.170, having touched a seven-month peak of 96.180.
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