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NZ dollar drops to week-low vs. Aussie as inflation stirs across Tasman

Wednesday 26th October 2016

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The New Zealand dollar fell to its lowest level in more than a week against the Australian dollar after inflation data across the Tasman printed stronger than the market had expected.

The kiwi fell to 93.13 Australian cents as at 5pm in Wellington, and briefly tumbled as low as 92.88 cents after the data from 93.79 cents yesterday. It traded at 71.56 US cents from 71.48 cents yesterday.

Australia's consumer price index rose 0.7 percent last quarter, beating market expectations of a 0.5 percent rate. Annual inflation of 1.3 percent beat forecasts for 1.1 percent. Stronger inflation will start to cancel out the reasons to keep monetary policy at stimulatory levels and reduces the case for a further rate cut, an event the market sees as an odds-on bet for the Reserve Bank of New Zealand next month.

The stronger headline inflation numbers "put a rocket up kiwi-oz," said Michael Johnston, senior trader at HiFX. There had still been some probability the RBA would cut rates again "but this takes that off the table."

Still, he said the detail of the inflation data meant it wasn't such a dramatic shift because part of it was the impact of unfavourable weather on fruit and vegetable prices.

The kiwi has probably seen its highs against the Australian dollar for now "the days of 95 (Australian cents), 96, or 97 we think are behind us," Johnston said.

He expects the Reserve Bank of New Zealand to cut the official cash rate a quarter point to 1.75 percent on Nov. 10 and keep the door open for more because a signal that it's done easing could drive up the kiwi - the opposite of what the RBNZ wants.

The Australian dollar has also been strengthening with prices of key commodity exports such as iron ore.

The kiwi rose to 58.80 British pence from 58.46 pence yesterday, when the pound slumped after an investment bank called it over-valued.

The local currency was little changed at 65.70 euro cents from 65.72 cents yesterday, when European Central Bank president Mario Draghi defended the bank's monetary policy and said it hadn't been hurting German households. 

The kiwi traded at 74.67 yen from 74.66 yen yesterday and increased to 4.8447 Chinese yuan from 4.8435 yuan. The trade-weighted index was little changed at 76.95 from 77.04 yesterday. 

New Zealand's two-year swap rate rose 2 basis points to 2.08 percent, and 10-year swaps were unchanged at 2.68 percent.

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