The New Zealand dollar fell sharply against all major currencies in hectic trading today after the Reserve Bank unexpectedly left the Official Cash Rate unchanged at 7.25 percent.
"The Reserve Bank decision set the tone for the day, and maybe the rest of the year," said ANZ Investment Bank's chief New Zealand dealer Murray Hindley.
He said the interest rate landscape had changed. Despite the Reserve Bank saying the door was still well open for another rate rise, markets had discounted that prospect.
The market, particularly local players, had been positioned for a rate hike that never eventuated.
Mr Hindley said the kiwi was now likely to push below US65c in the next day or two.
Huge volumes were traded in the swaps and futures market.
Over 11,000 December bank bill futures traded with the contract rallying 12 points.
The kiwi fell to a low of US65.53c from US66.16c just before today's announcement. It recovered to US65.70c by 5pm. Against the Australian dollar the kiwi slid from A86.85c to A86.14c.
Deutsche Bank head of global markets Sean Brown said the NZ dollar fall was no great surprise.
"The market was pretty much priced for a 50:50 outcome, so whichever way we went we were going to see a reasonable move," he said.
The market was looking at yesterday's Australian inflation figures and assessed a higher probability of Australian interest rates being raised in the near future. That had caused a reweighting the Australian cross rate.
Asked if the NZ dollar might have peaked for the time being he said: "I'm not sure about that."
With the OCR at 7.25 percent, the currency still provided good carry -- where investors in countries with lower interest rates invest in those with higher rates.
"If you want to make maximum money out of being short the currency, rate hikes help you in terms of slowing the economy," Mr Brown said.
"So the fact that we're not getting a rate hike, probably on a medium-term basis, offers you less value on the downside."
The chances of a rate hike in December were now reasonably low, he said.
"Given we're going to get quite a low CPI reading in the December quarter it's hard to see a December rate hike, and obviously today the RBNZ have given up the chance to impact on the mortgage rollovers in the fourth quarter."
Meanwhile the US dollar fell, extending losses after a warning on inflation by the Federal Reserve that was less harsh than some investors had hoped and suggested US interest rates would stay on hold for some time.
The US central bank kept the key overnight rate at 5.25 percent as expected for a third straight meeting on Wednesday, while the gist of its policy statement was largely the same as in September.
That triggered selling of the US dollar, which has been buoyed in the past month by expectations that the Fed could sound a harsher warning on inflation and perhaps point to another rate rise next year.
Reuters currency rates:
5pm today 5pm Wednesday
NZ dlr/US dlr US65.70c US66.04c
NZ dlr/Aust dlr A86.14c A86.81c
NZ dlr/euro 0.5200 0.5251
NZ dlr/yen 78.06 78.72
NZ dlr/stg 34.93p 35.22p
NZ TWI 66.12 66.62
Australian dollar US76.24c US76.07c
Euro/US dollar 1.2637 1.2572
US dollar/yen 118.79 119.21
- NZPA
<i>Currency:</i> NZ dollar drops sharply in hectic trading after rate call
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