The New Zealand dollar has tumbled more than half a US cent after Reserve Bank governor Graeme Wheeler said its strength is "unjustified and unsustainable" given the decline in commodity prices.
Mr Wheeler invoked two of the conditions for the bank to intervene in currency markets as he repeated the words he used in the July cash rate review statement entitled: New Zealand's Exchange Rate: Why the Reserve Bank believes its level is unjustified and unsustainable.
"We expect a significant further depreciation of the exchange rate as a result of the weakening in price of our dairy and log exports," he said.
Based on past experience, declines in the kiwi from unjustified and unsustainable levels could be large given the limited liquidity in New Zealand dollar markets and the impact of investors cutting their positions or exiting the currency when sentiment changes markedly, he said.
The New Zealand dollar dropped to US80.12 cents, from US80.70 cents immediately before the statement was released.
The trade-weighted index, the currency measure the Reserve Bank watches, fell to 77.77 from 78.27. It has fallen from its high of 88.35 US cents in July.
Imre Speizer, Westpac Banking Corp NZ senior market strategist, said the kiwi could test its big support level at 80 US cents, a point it's not fallen below since September 2013.
"It's clearly a very strong talking down of the currency," he said.
"It is yet another intervention threat. We have had three: We have had the July meeting, we have had the September MPS and we have had this.
"The currency has fallen a bit over the last few weeks, so clearly it's telling us that the currency even here is still too high, giving us a reminder it doesn't like it and giving us another intervention warning."
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