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NZ dollar holds near 3-year high vs. Australian dollar, may rise on bets on RBA rate cut

Tuesday 7th May 2013

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The New Zealand dollar held close to a 3 ½-year high against the Australian dollar on expectations that country's weakening economy will spur its central bank to cut interest rates, increasing the gap with local rates which are tipped to rise.

The kiwi recently traded at 83.07 Australian cents, close to a 3 ½-year high of 83.17 cents touched yesterday, and compared with a close of 83.08 cents at 5pm in Wellington. The currency traded at 85.21 US cents, from 85.47 cents yesterday.

In Australia, a report yesterday showed retail sales unexpectedly fell 0.4 percent in March. That, combined with lower inflation, worsening deficits, high government spending, and a slow-up in mining and construction has fuelled speculation the Reserve Bank of Australia will start leaning towards a rate cut, if not today then in coming months. Reuters expectations are for the cash rate to be held at 3 percent today.

"There is speculation out there that Australia will cut interest rates today," said Derek Rankin, director at Rankin Treasury Advisory in Auckland. "The bias is that Australia is going to cut. People think they are going to need to cut because their domestic data is generally soft."

The local currency may rise to 85 Australian cents in the next three months, Rankin said. "We may even get towards 88 cents towards the end of the year."

A cut in Australian interest rates would increase the relative attractiveness of New Zealand assets, where an expanding economy is expected to prompt the Reserve Bank to lift the official cash rate from a record low 2.5 percent. New Zealand's economy is benefitting from stronger commodity prices, an improving fiscal budget and stimulus from the rebuild of Christchurch.

"The New Zealand economy is doing better than anywhere," Rankin said. "We are seeing inflows from US, Europe and Japan and now seeing it from Australia."

At home, the government statistician releases the labour cost index for the first quarter today, expected to hold at the fourth-quarter's 0.5 percent pace, while the quarterly employment survey may show private sector wages rose 1 percent, after a 0.4 percent decline in the previous three months.

Against other currencies, the kiwi recently traded at 65.10 euro cents in Wellington, from 65.13 cents at 5pm yesterday and was at 54.75 British pence from 54.85 pence. It fell to 84.54 yen from 84.70 yen, while the trade-weighted index fell to 78.65 from 78.80.

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