Reserve Bank governor Graeme Wheeler fired a warning shot across the bow of the foreign exchange market this morning, pointedly reminding it of his power to intervene if the kiwi dollar continued to climb while export commodity prices were falling.
In a speech to a dairy industry conference Wheeler said an important factor in the currency's strength had been the strengthening in the terms of trade to the most favourable mix of export and import prices for 40 years.
But recently the two have parted company with the currency continuing to rise despite a string of falling dairy prices at Fonterra's fortnightly auctions.
Wheeler reiterated the bank's view that the exchange rate is overvalued and its current level unsustainable.
"Our exchange rate could be expected to weaken if one or more of the following occurs: the US economy continues to improve, global dairy prices continue to come off their recent highs, China's growth slows; financial market volatility begins to rise, or if there is a global 'risk off' event such as a correction in global equity prices," he said.