NZ dollar climbs above 4-year high vs. Aust on hawkish RBNZ stance

The New Zealand dollar rose to a four-and-a-half year high against its Australian counterpart amid diverging interest rate outlooks for the trans-Tasman neighbours.

The kiwi rose as high as 87.43 Australian cents, the highest since November 2008, and traded at 87.14 cents at 5pm in Wellington from 86.01 cents yesterday. It climbed to 79.80 US cents at 5pm from 79.29 cents at 8am and 79.66 cents yesterday.

Reserve Bank governor Graeme Wheeler kept the key rate on hold at 2.5 percent, lower than Australia’s 2.75 percent, while saying the “removal of monetary stimulus will likely be needed in the future and linking any hike to how much “the growing momentum in the housing market and construction sector spills over into inflation pressures.” He kept the expectation the OCR won’t move this year.

That’s in contrast to the Reserve Bank of Australia, which says it still has scope to cut rates as the peak of its resources boom nears and other parts of its economy slow. The RBA will review its key rate on Aug. 6.

Traders have priced in 54 basis points of hikes by the RBNZ over the next 12 months, and 39 basis points of cuts in Australia, according to the Overnight Index Swap curve. The yield on New Zealand’s two-year interest rate is almost 30 basis points above its Australian counterpart at 2.855 percent.

“It’s all about interest rate differentials between Australia and New Zealand – the market is overtly bearish on Australia and there’s no hope standing in front of it,” said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional NZ. The kiwi/Australian dollar cross “is well over-stretched and if we don’t see anything from the RBA I wouldn’t be surprised to see it snap back pretty quickly.”

Kelleher said the kiwi will likely take its lead from equity markets in the Northern Hemisphere trading session, where US companies are in the middle of reporting season.

The local currency increased to 60.41 euro cents at 5pm in Wellington from 60.31 cents yesterday and advanced to 52.03 British pence from 51.86 pence. It gained to 79.81 yen from 79.38 yen, and rose to 75.57 on the trade-weighted index from 75.18.

(BusinessDesk)