The Australian dollar took a bashing after the Reserve Bank of New Zealand central stepped up its rhetoric against the Kiwi’s strength, warning the currency is at risk of a “significant” fall from still unjustified levels.
The Australian dollar plunged 0.5 per cent in an hour to a fresh seven month low of US88.18¢ in the wake of the New Zealand currency’s steep drop following the release of the RBNZ statement, which marked an escalation in the central bank’s jawboning efforts.
The Kiwi dollar lost nearly 1 per cent and landed at a fresh one-year low at US79.95¢.
Central banks are said to “jawbone” when they attempt to sway markets without resorting to formal policy changes, normally using speeches and commentary.
RBNZ governor Graeme Wheeler warned the level of the exchange rate for the New Zealand dollar was “unjustified and unsustainable”.
“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,” Mr Wheeler said.
Mr Wheeler said a number of factors including slowing China’s growth, strong indicators of growth in the US and a deterioration in global risk appetite made the New Zealand dollar vulnerable.
“In the Reserve Bank’s view, the combination of these factors makes the New Zealand dollar susceptible to a significant downward adjustment over the coming six to nine months,” he said.
Westpac senior currency strategist Sean Callow said the tumble in the New Zealand dollar took its toll on the Aussie, which was already vulnerable from the recent tumble in the iron ore price.
“The Australian dollar suffered collateral damage from the slide in the Kiwi,” Mr Callow said.
The Australian and New Zealand currencies historically traded in the same direction, so any sharp movement in the Kiwi currency was likely to affect the Aussie.
“China’s the number one trade destination for both of them and there is a lot of trade with each other – so they [the currencies]do tend to trade roughly in the same direction,” he said.
The Kiwi dollar had been feeling the pressure after dairy giant Fonterra sharply cut its forecast payout to dairy farmers by nearly 12 per cent from its previous forecast.