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Dollar sinks vs Ausi dollar after RBA hikes rates

Wednesday 3rd March 2010

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The New Zealand dollar fell below 77 Australian cents, the lowest since December 2000, after the Reserve Bank of Australia hiked interest rates for the fourth time in five months, highlighting the yield gap between the trans-Tasman neighbours.

RBA Governor Glenn Stevens boosted the target cash rate to 4%, saying “with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.”

The hike makes the divergence between New Zealand and Australia more apparent, with New Zealand central bank Governor Alan Bollard expected to keep the official cash rate on hold at a record-low 2.5% in his Monetary Policy Statement next week. Bollard has indicated he will begin tightening monetary policy in the middle of the year. The kiwi sank as much as 0.8% against the Australian dollar after the RBA announcement.

“The kiwi’s going to hang around these levels for a while longer with the Australian economy much stronger,” said Mike Jones, strategist at Bank of New Zealand. “It’ll be three months before the RBNZ will signal rising interest rates, but they’re still coming, and perhaps the market’s losing sight of that fact.”

The kiwi sank to 76.98 Australian cents from 77.24 cents yesterday, and gained to 69.73 US cents from 69.44 cents. It slipped to 64.44 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 64.52 yesterday, and was little changed at 61.82 yen from 61.85 yen. It dropped to 51.20 euro cents from 51.49 cents yesterday, and edged down to 46.58 pence from 46.60 pence.

Jones said the currency may trade between 68.90 US cents and 70.20 cents today, with the key event being the release of Australia’s fourth-quarter gross domestic product data, which is expected to show the country’s economy grew 0.9% in the three months through December.

“It’s the Aussie show this week and direction for the kiwi is going to come from the kiwi/Australian cross,” he said.

Though the trans-Tasman currency cross weighed on the kiwi dollar, it was buoyed by an unexpected gain in the price of whole milk powder on Fonterra’s online auction. The average price of whole milk powder rose 0.8% to US$3,281, and was expected to fall by about 5% or 6%, Jones said.

Global sentiment for higher yields improved on the prospect the Greek Prime Minister will make an announcement laying out his plan to address the country’s ballooning deficit.

Businesswire.co.nz

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