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NZ dollar flirts with decade low vs Australian dollar on widening rate gap

Tuesday 26th October 2010

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The New Zealand dollar neared a 10-year low versus its Australian counterpart amid growing expectations the interest rate gap between the trans-Tasman neighbours will continue to widen.

The kiwi hit a six-month low 75.56 Australian cents after the third-quarter producer prices index beat expectations, stoking expectations the Reserve Bank of Australia will continue to tighten monetary policy. Governor Glenn Stevens added fuel to sentiment for higher rates yesterday, saying booming commodity prices were a positive shock. Traders are betting the RBA will hike the target cash rate 56 basis points over the coming year, according to the Overnight Index Swap curve, while pricing in a 0.52 percentage point increase for the RBNZ, ahead of this week’s official cash rate review, where it is expected to keep the OCR at 3%. 

“We’ve seen expectations firm up for the RBA to hike rates in November after solid PPI data, reiterating the view that the central bank’s raising interest rates earlier and quicker than the RBNZ,” said Mike Jones, strategist at Bank of New Zealand. “There’s a lot of pessimism priced into the kiwi/Aussie cross” and there’s a strong possibility it will break the decade-old barrier this week, he said.

The kiwi gained against the greenback after the G-20 meeting of finance ministers failed to reach any meaningful accord over the so-called ‘currency wars’, sparking renewed selling in the U.S. dollar amid speculation the Federal Reserve will start printing more money next week. The finance ministers agreed to shun competitive currency devaluations, but stopped short of setting targets to reduce trade imbalances.

The kiwi fell to 75.89 Australian cents from 76.15 cents on Friday in New York, and rose to 75.29 U.S. cents from 74.80 cents. It gained to 60.87 yen from 60.64 yen last week, and increased to 66.61 on the trade-weighted index of major trading partners’ currencies from 66.42. It advanced to 53.87 euro cents from 53.67 cents last week, and rose to 47.79 pence from 47.54 pence.

Jones said the currency may trade between 74.90 U.S. cents and 76 cents today with upbeat investor sentiment likely to continue when Asian markets open.

The greenback will probably stay under pressure until the Federal Open Market Committee meets next week, after investment bank Goldman Sachs said more asset purchases are “almost certain” and could amount to as much as US$2 trillion. The Dollar Index, a measure of the greenback against a basket of currencies, fell 0.4% to 77.08.



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