Dollar weakens against Australian counterpart

Monday 12th October 2009

The New Zealand dollar weakened against its Australian counterpart on speculation the Reserve Bank of Australia has embarked on a series of interest rate increases that will lift demand for its currency relative to the kiwi.

The RBA surprised investors last week by raising its benchmark rate a quarter point to 3.25%. The move was followed by government figures showing the unemployment rate unexpectedly fell while the Australian economy stacked on jobs.

Terry McCrann, a columnist and well-known RBA watcher for the Australian newspaper, wrote on Saturday that the central bank may raise its key rate by 50 basis points to 3.75% on Melbourne Cup Day, November 3, when its board meets.

That would widen the gap with the Reserve Bank of New Zealand’s official cash rate to 1.25 percentage points.

“If you’ve got the choice of a economy just coming out of recession and one that never went into recession, which one would you pick,” said Tim Kelleher, vice president of institutional banking and markets Commonwealth Bank. The market for Australia’s bonds and dollar is also “a lot more liquid.”

The kiwi dollar was little changed at 73.36 US cents. It weakened to 81.07 Australian cents from 81.17 cents on Friday and as much as 83.50 cents last week. Against the yen, the kiwi weakened to 65.64 from 65.86 and was little changed at 49.80 euro cents.The trade-weighted index fell to 66.33 from 66.66.

Reserve Bank Governor Alan Bollard has said interest rates will stay low through until the second half of 2010 though markets are pricing in a rate hike before that.

“Market pricing is now consistent with a 25 basis points rate hike from the RBNZ in January and about 100-125 basis points of tightening over the next twelve months,” said Danica Hampton, currency strategist at Bank of New Zealand. “The sooner-than-anticipated RBA rate hike saw investors bring forward the timing of anticipated RBNZ rate hikes. This still looks overly hawkish to us.”

Businesswire.co.nz

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