Reserve Bank Governor put a double whammy on the New Zealand dollar today, announcing plans to intervene to curb the worst of the kiwi's volatility as well as keeping the Official Cash Rate (OCR) unchanged.
The kiwi, which was at US66.76c at 8.30am today plunged by a cent almost immediately after the Monetary Policy Statement (MPS) and closed at US65.64c at 5pm in Wellington. Its range for the day was US65.52c to US66.76c.
The Australian dollar which like the kiwi had been trading softer against a firmer greenback before the RB announcement was also affected, falling from US75.04c at 8.30am to US74.26c.
Dr Bollard, who surprised markets in January when he raised the OCR by 0.25 per cent, surprised many again today by holding it unchanged at 5.25 per cent.
More significantly, Dr Bollard said he was seeking approval from Finance Minister Michael Cullen to give the bank expanded power to intervene in the foreign exchange market to influence the level of the currency.
Westpac currency strategist Johnathan Bayley said there was always going to be currency reaction to the decision to leave rates unchanged.
However, as the kiwi was retreating, news of Dr Bollard's intervention plans added momentum to the fall.
"While the currency was still heading south, a backup comment from Dr Cullen saying he supported the change in FX policy exacerbated the fall," Mr Bayley said.
He said the kiwi may have further to fall. "The danger is the overnight market will take the move and run with it."
The next level of technical support was at the US65.25c level where Mr Bayley said he hoped the kiwi would find a floor.
He warned the kiwi's plunge to lower levels today may be temporary. "We're still firm believers that the US dollar has further to fall."
Meanwhile today's announcement also affected the kiwi/aussie cross which is "always sensitive to changing policy expectations", MR Bayley said.
At 5pm in Wellington the kiwi was fetching A88.43c (A89.12c at 5pm yesterday), while the aussie was buying $1.1318 ($1.1240).
The greenback was buying 110.63 yen (111.27), while the euro was at US$1.2198 (US$1.2317).
On the crosses the kiwi was buying 0.5382 euro (0.5476), 72.64 yen (75.03), 36.49 British pence (36.89), 0.8469 Swiss francs (0.8637).
The trade-weighted index was at 66.25 (67.72), while the monetary conditions index was at plus 594 (718).
Today's MPS also affected debt markets with New Zealand bank bills and government bonds rallying strongly.
The benchmark 90 day bank bill yield was 15 basis points lower and bond yields fell by up to 14 basis points, with the yield curve steepening as long end underperformed.
The 90-day bank bill yields were at 5.50 per cent (5.66).
The February 2006 yields were at 5.35 per cent (5.49), July 2009 bonds were unchanged at 5.56 per cent, and April 2013s were at 5.71 per cent (5.78).
- NZPA
<i>Currency:</i> Kiwi plunges after Reserve Bank double whammy
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