The New Zealand dollar tumbled to a 3-1/2-year low on Thursday after the Reserve Bank of New Zealand dropped its tightening bias on official interest rates, instead signalling that the next move could be either up or down. The kiwi fell to $0.7320, its lowest since March 2011, after the RBNZ said that further rate adjustments "either up or down", would depend on economic data, after holding rates at 3.5 percent for the fourth straight policy review.
The kiwi stumbled to a seven-week trough versus the Australian dollar, which rose to NZ$1.0795. Versus the broadly stronger US dollar, the Aussie slipped 0.6 percent to $0.7888, approaching a 5 1/2-year low of $0.7850 hit the previous day. Investors sold the kiwi across the board, pushing it to a three-month low around 85.90 yen after the RBNZ explicitly softened its rate stance from a previous statement in December, when it said that rates would keep rising after 100 basis points' worth of tightening last year.
The move sparked a rally in domestic government bonds, pushing yields down as much as 14.5 basis points and knocking the benchmark 10-year yield to 3.195 percent, a level last seen in May 2013. "The explicit allowance for the OCR to decrease is more dovish than the purely neutral bias the market had expected," Westpac analysts said in a note. The drop in the kiwi reflects diminishing appeal for the higher-yielding currency due to a growing view that it may not increase its rate advantage against other major currencies for some time to come.
It has lost around 17 percent versus the US dollar since mid-2014, due in part to expectations that US interest rates will rise sometime this year, an outlook which the Federal Reserve reinforced on Wednesday. Analysts said the kiwi may fall further, while adding that a fall below $0.7000 was unlikely given that a solid domestic economy would keep the currency stronger than the RBNZ would like.
"The kiwi could go lower, but we think it's going to do a lot of work in the low- to mid- $0.70 range ... we might ease a little bit more against the US dollar but we're going to stay very firm against a number of cross rates," ASB economist Chris Tennent-Brown said. "So a high exchange rate will still be an issue for the RBNZ even if the New Zealand dollar eases against the US dollar."