The New Zealand dollar touched its highest in four-and-a-half years against the Aussie this morning after the Reserve Bank of Australia governor Glenn Stevens yesterday suggested a decision on whether to hold interest rates this week was a close call.
The kiwi touched 85.80 Australian cents today, its highest since November 2008. The local currency recently traded at 85.62 Australian cents, up from 84.96 at the 5 pm market close in Wellington yesterday. The kiwi advanced to 77.77 US cents from 77.41 yesterday.
The Australian dollar fell after Stevens said the board "deliberated for a very long time" before holding its key interest rate unchanged at 2.75 per cent. Australian interest rates are expected to fall as the mining boom has peaked and concerns mount about slowing growth in China, the country's largest trading partner. By comparison, New Zealand interest rates are expected to rise from their record low 2.5 per cent as the rebuild of Christchurch and a shortage of properties in Auckland spur inflation.
"We are quite surprised by the rapidity of the move, but not the direction. The kiwi economy is doing well, the Aussie economy not so well," said Sam Tuck, senior manager FX at ANZ New Zealand. "The market had only been pricing in a 16 per cent to 18 per cent chance of a rate cut so they were quite taken by surprise that it was a close decision."
Stevens, speaking in Brisbane where the board had met the previous day, said if the economy needs a lower exchange rate, it will probably get it.
"They still think the Australian dollar is overvalued and they want the dollar lower," said ANZ's Tuck. "The RBA wants and will continue to pressure the Aussie dollar down."
The kiwi may touch 87 Australian cents to 88 cents in the next month and is likely to oscillate around that level in three months' time, Tuck said.
Traders will be eyeing interest rate decisions tonight from the Bank of England and the European Central Bank.
The local currency weakened to 50.80 British pence from 51.07 pence yesterday. The Bank of England's new governor Mark Carney isn't expected to make any changes to the bank's record low 0.5 per cent benchmark interest rate or its quantitative easing programme, according to Reuters polls.
The bank's policy of not issuing a statement on a 'no change' decision means traders may have to wait for the meeting minutes on July 17 to get an insight into the new governor's thinking.
The New Zealand dollar was little changed at 59.70 euro cents from 59.68 cents yesterday. The European Central Bank is unlikely to cut its main refinancing rate below the current 0.5 per cent and bank chief Mario Draghi is likely to continue to emphasise that policy may remain loose for some time, according to economists.
Currency trading may quieten about midnight, following those announcements, as US markets close for the Independence Day holiday, ANZ's Tuck said.
The New Zealand dollar weakened to 77.56 yen from 77.89 yen. The trade-weighted index advanced to 74.00 from 73.85.