New Zealand dollar sinks on RBNZ' dovish tilt

NZD Notes — New Zealand dollar falls more than 1% on RBNZ policy tone. Reuters

The New Zealand dollar fell on Thursday as the Reserve Bank of New Zealand said it stands ready to lower interest rates if demand weakens and wage and price inflation undershoot the official target.

NZD/USD dropped 1.3% on the day to 0.7583 from the previous close of 0.7686, adding to the 0.4% slide on Wednesday, that had taken the pair off a three-month high of 0.7745 hit intra-day.

The Kiwi dollar is still 1.6% up so far in April, more than reversing the 1.3% decline of March and keeping the uptrend since the 5-1/-2-year low of 0.7176 touched in February.

"The timing of future adjustments in the OCR (official cash rate) will depend on how inflationary pressures evolve in both the non-traded and traded sectors," the RBNZ said in its statement on Thursday.

"It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target."

The central bank continued to sound concerned about the strength of the NZ dollar as the correction off last June's multi-year high has ended at the February trough and then regained upward momentum.

"We are watching closely the ongoing impact on tradables inflation from global forces and the high New Zealand dollar. On a trade-weighted basis, the New Zealand dollar continues to be unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals," the central bank said.

"The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome."

The Kiwi dollar is now testing resistance at 0.7700 and a break above that will open doors to 0.8000. A break of that will expose the June high of 0.8838, which was just three pips away from the 2011 record high of 0.8841.

Traders also said the balanced FOMC statement on Wednesday had a dovish impact on the greenback, in effect preventing sharper losses in the Kiwi dollar. The USD index fell to a two-month low of 98.64 following the Fed rate announcement.