NZ dollar rises to post-float record against Aussie as interest rate paths diverge

Wednesday 31st December 2014

The New Zealand dollar rose to its highest against the Australian dollar since the Aussie was floated in 1983, as investors favour the outlook for the New Zealand economy where interest rates are set to rise further, compared with Australia where rates may fall.

The kiwi touched 95.93 Australian cents overnight, and was trading at 95.64 cents at 8am in Wellington, from 95.61 cents at 5pm yesterday. The local currency advanced to 78.31 US cents from 77.71 cents yesterday.

The New Zealand dollar has appreciated 3.2 percent against the Aussie this month as New Zealand's Reserve Bank indicated it intends to hike interest rates further, compared with Australia where economists are starting to price in interest rate cuts. That makes the kiwi more attractive to investors looking for yield with interest rates in New Zealand already 1 percentage point higher at 3.5 percent.

"It's a continuation of a move that's been in place for a number of weeks now," said Richard Franulovich, currency strategist at Westpac Banking Corp in New York. "Back in mid-December, the RBNZ formally reinstated a tightening bias in their guidance and ever since then, kiwi has been outperforming Aussie and meanwhile across the Tasman you have got easing risk priced into the curve so it's a pretty stark contrast in the trajectory of monetary policy for the two economies."

Westpac's Franulovich said the kiwi may continue to track higher against the Aussie in the absence of any change in the interest rate outlooks however he doubts it will reach parity.

The cross rate may stabilise should iron ore prices continue their bounce seen in the last few sessions and if there is weakness in next week's GlobalDairyTrade auction, he said.

New Zealand's Reserve Bank may also start to talk down the kiwi, and Australia's Reserve Bank may not ease monetary policy as early as its next meeting on Feb. 3

Traders will be eyeing the release of today's HSBC China Manufacturing PMI report, with a higher than expected reading likely to bolster the Aussie, he said.

The New Zealand dollar rose to 64.39 euro cents from 64.01 cents yesterday, advanced to 50.31 British pence from 50.06 pence and was little changed at 93.60 yen from 93.61 yen. The trade-weighted index gained to 79.38 from 79.07 yesterday.

BusinessDesk.co.nz

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