N.Z. Leader’s Shock at Kiwi Drop Spurs Gain Central Bank May Rue

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New Zealand’s dollar climbed from near a six-year low after Prime Minister John Key said the currency’s 25 percent slump in the past year was faster than expected.

The kiwi advanced at least 0.3 percent against all 31 major peers as Key also said the weaker currency was helping exporters and the strength of tourism meant New Zealanders shouldn’t be gloomy about the economy. The Reserve Bank of New Zealand said last month the kiwi was too strong considering tumbling commodity prices.

The local dollar had tumbled about 5 percent in the past month as speculation intensified the collapse in prices for dairy -- the nation’s biggest export -- would spur the RBNZ to reduce its main rate as much as 0.5 percentage point on Thursday. Hedge funds and other large speculators boosted bets on kiwi declines to a record for a fourth-straight week, data released Friday in the U.S. showed.

“The comment’s giving traders license to take some profit from what is a very overstretched position,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne. “The central bank probably wouldn’t be overly too happy about his rhetoric, and I have a feeling also that deep down he’d still want the currency below 60 cents,” Weston said, referring to Key.

New Zealand’s dollar surged 0.9 percent to 65.86 U.S. cents as of 7:25 a.m. London time, after jumping as much as 1 percent, the most since July 8. The currency dropped to 64.99 cents on July 16, the lowest since July 2009.

Goldilocks Level

Key, a former head of currency trading at Merrill Lynch, said in September last year that the kiwi’s “Goldilocks” zone of not too high and not too low was around 65 cents.

“It’s fallen further and faster than anticipated in various scenarios in the budget update a couple of months ago,” Key said at a post-Cabinet press conference in Wellington. “That’s providing a lot of help and support for exporters.”

Swaps traders are certain the RBNZ will lower the official cash rate by at least 0.25 percentage point from its current 3.25 percent, with 31 percent odds of a drop to 2.75 percent, data compiled by Bloomberg show. Governor Graeme Wheeler last month started unwinding the one percentage point of increases he carried out in 2014.

“With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued,” Wheeler said June 11 after cutting rates.

Large speculators increased their net wagers on declines in the New Zealand dollar to 19,654 contracts as of July 14, data from the Commodity Futures Trading Commission show.

The kiwi’s relative strength index fell to 23.5 on July 16, below the level of 30 that some traders deem to indicate an asset has fallen too far, too fast, and is likely to rebound.

“This was an opportunity for people to cover shorts,” IG’s Weston said. “We are very oversold technically.”

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