Australian dollar sank after Reserve Bank of New Zealand confirmed it intervened in currency markets

The Australian dollar dropped to a record low as the Reserve Bank of New Zealand (RBNZ) confirmed that it intervened in currency markets in August.

In midday trading the Australian dollar dropped to US86.94¢ as soon as traders caught wind of RBNZ’s sale of $NZ521 million last month – its biggest sale in 7 years. The Australian dollar was at its lowest point since January – the last time it traded at that level was four years ago in July 2010.

However, it then headed north, trading as high as US87.68¢ in early-afternoon trade and then settling at around the US87.59¢ mark.

The New Zealand dollar was hit harder, falling by 2 percent down to US77.09¢.

RBS Morgans currency strategist Gregg Gibbs said:

“The argument that the New Zealand dollar is overvalued, which the RBNZ has done and used it to justify its intervention, is very much the same case in Australia. It’s driven by a commodity price story,”

“[The strength of the greenback] has been the story in currency markets over the last month. You could argue that the RBNZ is coming in at a time of dollar strength to help get the wind behind their sails in getting the Kiwi lower and that certainly has helped.”

On Tuesday Australian private sector credit is scheduled to be released, along with retail sales on Wednesday, followed by building approvals the day after.

Last Thursday both the New Zealand and Australian dollar were under pressure when Graeme Wheeler, the Reserve Bank of New Zealand governor, issued a statement saying that the Kiwi’s strength was “unjustified and unsustainable”.

Manufacturing data is going to be released on Wednesday from the U.S. and on Friday non-farm payrolls will be too. There is strong sentiment that the US economy is improving, which will probably provide a ceiling for the Australian dollar.

HSBC chief economist Paul Bloxham, said that a weak Aussie dollar could be good news for the local economy:

“It will be a move certainly welcomed by the RBA because while low interest rates have been doing their job of rebalancing growth in the economy for quite some time now, the constraint had been that the Aussie dollar remained too high.”

“Now that the Aussie dollar has fallen, it will assist to speed up the ­rebalancing of growth from mining-led growth to the non-mining sectors of the economy.”

He added also that a weak Aussie dollar and low interest rates will have an impact on local retail, housing and exports:

“We’re already seeing low interest rates are lifting the housing market, the housing construction cycle, and they’re lifting the retail market to some degree. A lower exchange rate will help to support the exporting industries and the import competing industries  … it will support retail. It will discourage domestic residents from buying things online and offshore, and they may then choose to spend more money locally.”