Both the Australian dollar and the New Zealand dollar suffered heavy losses on Tuesday after both national central banks said their currencies were too high and hurting economic growth. The kiwi was hit the hardest falling over 1 percent at the trading trough but the aussie was not that far behind.
New Zealand is in a slight quandary with an overheating housing market making it difficult to raise rates which would send the currency higher. So they announced lending restrictions. But there was more investor reaction to the RBNZ terming the currency 'overvalued' rather than just 'high' as has been the recent case. In the immediate reaction, investors saw the RBNZ as being at least less hawkish if not outrightly more dovish and willing to do more not to raise rates given the currency concerns.
In Australia, the RBA minutes of the last meeting were taken as dovish with a moderate easing bias even if no further cut is imminent. Rate futures are now pricing in a 95.41 percent chance the benchmark rate stays at 2.5 percent at the next meeting on September 3.
Both currencies probably overshot in the immediate reaction to their respective central banks. The aussie safely held 90 U.S. cents but looking further out, the path to 85 U.S. cents is likely. The Australian economy, as any recent tertiary graduate or miner will tell you, is facing major headwinds.
The kiwi is more interesting. All hints of problems supplying milk are past and the currency could retain some strength until the economy runs out of steam on its own. If the RBNZ is forced to raise rates next year, and the bank does not appear averse to that scenario, the currency definitely has better prospects than its aussie cousin.
Year to date the aussie has lost 12.8 percent against the dollar. The kiwi is down just 3.7 percent with more than 1 percent of that on Tuesday alone.