RBNZ central bank governor Wheeler gave a speech to exporters that set the market abuzz. The speech had tow parts, one concerning intervention and the other concerning valuation. He stated there are four reasons for intervention:
1. whether the exchange rate is at exceptional levels
2. whether the level is justified
3. whether intervention is consistent with monetary policy
4. whether conditions are justified to achieve result
All of this is very standard intervention rhetoric. You may not agree with the criteria but this is how an activist central bank would answer the question of whether intervention should take place. The second shoe is what he said next which caused a market stir.
The term of trade are 20% higher than the 1990's. The real equilibrium exchange rate is not reflecting productivity differential declines, REER is high versus dollar and FX movements correlate with terms of trade. What he may be saying is that the TOT are too high and do not reflect reality of productivity declines and there is a reason for intervention. The market took this to mean that intervention to bring down the kiwi is possible. When the market thinks that can happen, it will sent prices lower. The jump lower in the kiwi was immediate.
If a central banker tell you his currency is overvalued, you better listen.
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