NZ dollar rises to 3-week high vs. Australian dollar on bets for RBA rate cut

Tuesday 2nd August 2016

The New Zealand dollar rose to a three-week high against the Australian dollar amid expectations the Reserve Bank of Australia will cut its cash rate to a record low 1.5 percent today, boosting the relative appeal of the kiwi.

The New Zealand dollar touched 95.20 Australian cents and was trading at 95.05 cents as at 8am in Wellington, from 94.91 cents late yesterday. The kiwi fell to 71.67 US cents from 72.23 cents yesterday.

Traders yesterday were putting odds of 68 percent on the RBA cutting its benchmark interest rate at 4:30pm (NZ time) today after figures last week showed core inflation rose just 0.4 percent in the second quarter for a record low annual rate of 1.5 percent. A cut would widen the gap with New Zealand's official cash rate at 2.25 percent, albeit only temporarily, given expectations the RBNZ will make its own cut on Aug. 11.

"NZD/AUD has the potential to spike higher should the RBA cut at 4.30pm as we expect; this is not fully priced in," David Croy, senior rates strategist at ANZ New Zealand, said in a note.

The kiwi could fall against the greenback if the Australian dollar declined following a rate cut, he said. "But the reality is, we’re unlikely to see NZD weakness sustained until the growth cycle turns, and unless we see the OCR go much lower."

Having declined the past few days, the US dollar index edged higher overnight after William Dudley, president of the New York Fed, said investors may be underestimating the number of times the central bank is prepared to hike rates this year and next.

In the domestic market, QV is set to release house price data for July today and the Reserve Bank releases its latest survey of expectations this afternoon, which will show how much low inflation expectations have become entrenched. Overnight, the latest GlobalDairyTrade auction will be closely watched.

The trade-weighted index fell to 76.26 from 76.61 yesterday. The kiwi slid to 73.36 yen from 73.89 yen and declined to 4.7577 yuan from 4.7893 yuan. It fell to 64.22 euro cents from 64.60 cents and slipped to 54.35 British pence from 54.50 pence.

BusinessDesk.co.nz

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