NZ dollar not far from lowest level in over two months Falls on...

• NZ dollar not far from lowest level in over two months
• Falls on softening economy, political outlook
• Noise on potential FX intervention also weighs

(Updates with Wheeler comments and market reaction)

The New Zealand dollar is poised for its worst monthly fall since January 2016 as talk of central bank intervention to cap its gains adds to the currency's woes, but market participants say the Reserve Bank of New Zealand is nowhere close to acting.

Some media interviews sparked speculation this month that the Reserve Bank of New Zealand could be one step closer to intervening in the foreign exchange market, after Governor Graeme Wheeler noted that the central bank has such powers at a parliament hearing following the latest rates decision.

Asked by Reuters at the time whether Wheeler's comments suggested the central bank was a bit closer to intervening, RBNZ Assistant Governor John McDermott said: "No... if we were designing that you would find that in the press conference, it could even be in the statement."

Historically, the RBNZ has been very reluctant to intervene in the market to influence the currency.

Nonetheless, the noise helped take the Kiwi, which has been falling since late July, down to its lowest levels over two months.

It briefly fell back towards those levels on Wednesday after Wheeler reiterated a lower New Zealand dollar was needed to increase tradables inflation and help rebalance growth, underscoring how sensitive it currently is.

Analysts said a currency intervention was unlikely any time soon given that the Kiwi was not exceptionally high and that its level was justified by economic fundamentals - two key conditions for the central bank to act in the market.

"Given the criteria that the RBNZ sets out for themselves on intervention in the currency, I don't think they are anywhere near intervening in the currency," said Stuart Ive, private client manager at OM Financial.

"The fact that they mentioned it was almost by an off the cuff remark obviously aimed at, to some extent, jaw-boning the currency down."

At $0.7257, the New Zealand dollar is not far from its lowest levels in more than two months against the U.S. dollar. It had already traded well below over two-year highs of $0.7558 before Wheeler's comments at around $0.7337.

It looks set for a loss of 3.4 percent this month, the biggest since a 5.2 percent drop in early 2016. But it has still gained nearly 5 percent against the greenback so far this year.

A recent softening in economic data gave investors an excuse to cash in on their long positions in the New Zealand dollar, or bets that the currency would rise.

Investors also pushed out rate hike bets after the central bank stuck to its neutral position in August, weighing on the local dollar.

More downside is expected in the run-up to a general election in September that has become highly contested after a change in Labour leadership.

Even though first-quarter growth and second quarter inflation underwhelmed expectations, New Zealand is still expected to be among the fastest growing advanced economies this year and its terms of trade are also expected to remain solid.

The country's term of trade reached its highest level in 40 years in the first quarter of 2017 and a second-quarter release later this week is expected to show similarly upbeat data. Trade data is due on Friday.

"When the central bank is thinking about whether the currency is overvalued or undervalued, the RBNZ is thinking about the terms of trade," Joseph Capurso, strategist, at CBA said.

"If the terms of trade is the biggest driver of the New Zealand dollar and that's the highest ever, then it's hard to make the conclusion that the New Zealand dollar is overvalued."

On a trade-weighted basis, the New Zealand dollar <=NZD> this week hit its lowest in over three months at around 75.59, well off a 5-1/2-month high of 79.26 in July and far below near two-year highs of 80.13 seen in February. Analysts said this makes an imminent intervention unlikely.

"There (were) about 20 other opportunities ... during the year when it was actually a lot higher," Jason Wong, senior market strategist at BNZ said.

"No one really believes the Reserve Bank is going to be intervening. It makes no sense whatsoever."

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Kiwi succumbs to RBNZ jawboning	http://reut.rs/2gn14A5 

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