Dollar holds near three-month high ahead of RBA review

By Paul McBeth

Monday 6th April 2009

The New Zealand dollar held near a three month high ahead of tomorrow's monetary policy review by the Australian central, which is expected to hold the country's benchmark interest rate.

The Reserve Bank of Australia is expected to keep its policy interest rate at 3.25%, according to a Reuters survey, as it heads towards its first economic contraction in almost two decades, and may face a A$100 billion deficit over the next three years.

However, noted RBA watcher Alan Mitchell wrote in the Australian Financial Review the odds had shifted in favour of a 50 basis point cut by the central bank. The kiwi dollar has held above 58 US cents as optimism that the global economy may be on the road to recovery continues.

"The risk is if the RBA cuts rates people buying might reverse their positions," said Danica Hampton, currency strategist at Bank of New Zealand. "We could see some flows in the cross-rates, but the kiwi should get dragged along on the Aussie's coat-tails," she said, referring to the Australian dollar by its colloquial name.

The kiwi rose to 58.55 US cents from 58.49 cents on Friday, and climbed to 58.59 yen from 58.45 yen. It gained to 82.07 Australian cents from 81.77 cents on Friday, and sank to 43.38 euro cents from 43.51 cents.

Hampton said the kiwi currency may trade between 57.80 US cents and 59 cents today, and may rise as high as 59.50 cents if investors continue to support equity markets when trading resumes overseas.

Global optimism was buoyed by comments from US Federal Reserve Chairman Ben Bernanke, that he will use all tools available to him to stabilise financial markets. This outweighed the negative data out of the US, with non-farm payrolls falling a greater-than-expected 663,000 in March, taking unemployment to a 25-year high of 8.5%. More than 5 million American have lost their jobs since the US economy slipped into recession in December 2007.

The kiwi dollar was also helped by the "general sense that the New Zealand economy will come out of the global recession in relatively good shape," Hampton said. The average price of milk powder has increased for two consecutive months on Fonterra Cooperative Group's online auctions, and the ANZ commodity price index, a measure of the global price of New Zealand's exports, gained 1% in March.

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