The New Zealand dollar dropped more than 100 points at the start of Monday trade when the Reserve Bank of New Zealand confirmed that it intervened in the foreign exchange markets. with RBNZ Governor Allan Bollard stating that the central bank regarded current levels “exceptional and unjustified in terms of economic fundamentals.” Traders could not be faulted for wondering just what did the NZ monetary authorities expect after the surprise rate hike last week that took short term rates to 8.00% - the highest amongst the major currencies. The unit skyrocketed by 2.7% against the dollar last week as a result of that hike reaching a multi-decade high of .7637.

Thus, less than three trading days after raising rates – an act that fueled more speculative buying of the New Zealand dollar - RBNZ policy makers find themselves in the position of driving down the value of the unit with the help of a $5.3 Billion tax payer financed fund designed specifically to stabilize the currency. Logic aside the kiwi has a history of responding to government “talk-downs” of the currency. A similar dynamic occurred at the end of 2005 when New Zealand policymakers actively dissuaded further flows into the unit on the grounds that it was overvalued. At that time the currency plunged from 7200 to 5991 in matter of three months. With the latest reading in New Zealand business sentiment declining sharply from –19.4 to –48.2 chances are good that the country will now begin to produce negative economic surprises as the full impact of the overvalued currency weighs on its export sector all of which suggests that currency may have set a near term top.

Meanwhile in the Euro-zone French Industrial Production and Manufacturing Production both missed badly printing at nine month lows as the high value of the euro curbed production in the region’s second largest economy. The EURUSD continues to bounce in the 1.3600-1.3300 range and as we noted in our weekly given the paucity of data from the EZ this week, the direction of the pair will most certainly be guided by the US events as traders watch bonds, US Retails Sales and inflation reports. For the time being the EURUSD continues to range but if the news of the week proves positive for the buck the pair could easily tumble to the lower 1.3000’s to test its true support in that region.

Boris Schlossberg is a Senior Currency Strategist at FXCM.