The New Zealand dollar's precipitous drop, triggered by the central bank's disclosure that it had intervened aggressively in the FX market, has investors questioning whether it faces a free fall.
On Monday, the kiwi dollar plunged nearly 2 percent to a 14-month low of $0.77 against the U.S. dollar, after data showed the Reserve Bank of New Zealand (RBNZ) sold a net 521 million New Zealand dollars in August. The sale – the largest in seven years – was a bid to lower the exchange rate, which has been a headwind for exporters.
With the RBNZ on a campaign to weaken the New Zealand dollar, the currency is appears to be a one-way bet over the longer-run, say strategists, but declines are likely to be orderly and gradual.
"Clearly, the risks are heavily skewered to downside, but I'm not expecting a free fall," Ray Attrill, global head of FX strategy at National Australia Bank (NAB) told CNBC on Tuesday.
One reason for this is U.S. dollar gains are set to slow, Attrill said, pointing out that the currency is overbought.
Secondly, continued losses in the New Zealand dollar may begin to revive expectations of a rate hike, which could support for the currency.