Kiwi drops to five-month low vs Ausi

Tuesday 21st September 2010

The New Zealand dollar dropped to a five-month low against its Australian counterpart after Reserve Bank of Australia Governor Glenn Stevens said interest rates will have to rise if that economy continues to expand.

Markets ramped up their expectations for hikes to Australia's target cash rate after Stevens raised the prospect of higher rates if "downside possibilities do not materialise."

Investors predict an increase of 45 basis points to the benchmark interest rate over the coming 12 months, according to the Overnight Interest Swap curve. The kiwi dollar dropped below 77 Australian cents for the first time since April 22, and may extend its loss if the RBA minutes from this month's meeting give any further hints about rate hikes when they're released this afternoon.

"The Aussie dollar powered away after a bullish speech by RBA Governor Stevens yesterday, which gave a clear hint monetary policy has more work to do to manage the robust upswing in the Australian economy," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

"Everybody knows there's a clear divergence between the New Zealand and Australian economies, and that's why the kiwi lagged behind."

The kiwi fell as low as 76.81 Australian cents from 77.12 cents yesterday, and recently traded at 77 cents. It was little changed at 72.92 US cents from 73 cents yesterday, and recently traded at 67.05 on the trade-weighted index of major trading partners' currencies from 67.03. It rose to 55.79 euro cents from 55.64 cents yesterday, and gained to 46.85 pence from 46.68 pence. It was little changed at 62.48 yen from 62.49 yen yesterday.

Goh said the currency may trade between 72.57 US cents and 73.27 cents today, with markets waiting for the Federal Open Market Committee announcement on its review of the Federal Funds rate, today in the US.

Speculation has been growing the Fed will ramp up its asset purchase programme in a bid to revive the stalling recovery after Goldman Sachs predicted Federal Reserve Chairman Ben Bernanke will announce more quantitative easing at the meeting.

Goh said the prospect of the Fed printing more money is unlikely, with Bernanke already saying the outlook would have to significantly deteriorate for that to happen.

"Things are bad, sure, but they're not that bad," he said.

The release of August's travel and migration statistics and credit card billings isn't expected to move the kiwi, with more traders waiting for the Fed announcement.

Businesswire.co.nz

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