The New Zealand dollar rose to a 21-month high against the euro after data showed the Eurozone slipped into deflation, increasing pressure on the European Central Bank to add further stimulus. The kiwi touched a fresh post-float high against the Australian dollar as investors favour the outlook for the local economy.

The kiwi touched 65.74 euro cents, and was trading at 65.63 cents at 8am in Wellington, from 65.28 cents at 5pm yesterday. The local currency touched 96.52 Australian cents, its highest since the Aussie was floated in 1983, and was trading at 96.38 cents at 8am from 95.98 cents yesterday. The New Zealand dollar advanced to 77.69 US cents from 77.53 cents yesterday.

The euro fell to a nine-year low against the greenback after a report showed Eurozone inflation turned negative for the first time since 2009, with a slump in oil prices driving a bigger than expected decline. Consumer prices in the 18 countries that share the euro fell 0.2 per cent in December from the year earlier, lower than the 0.1 per cent fall forecast in a Reuters poll of economists. That strengthened speculation the ECB will launch a programme of buying government bonds with new money, known as quantitative easing, at its January 22 meeting.

Read also:
Deflation spectre stalks Europe

Advertisement

"Euro area inflation fell into negative territory in December, intensifying market expectations that the ECB will adopt outright sovereign bond purchases," ANZ Bank New Zealand chief economist Cameron Bagrie said in a note. "For New Zealand, prospects for QE from the ECB will accentuate the Reserve Bank's frustration with the New Zealand dollar."

The trade-weighted index is now about 4 per cent above the Reserve Bank's December projections, Bagrie said. While the New Zealand dollar may weaken against a strengthening US dollar, other crosses are likely to remain up, he said. The trade-weighted index was recently at 79.58 from 79.32 yesterday.

ANZ expected the kiwi to trade between 65.10 euro cents and 65.60 cents today.

Meanwhile, levels above 96 Australian cents were likely to bring out further New Zealand dollar selling, Bagrie said.

"Every cent gain from here gets harder and requires new information on either side of the Tasman to achieve," he said.

The Bank of New Zealand concurred, with senior market strategist Kymberly Martin saying the diverging prospects of the Australian and New Zealand economies were already priced in to the cross, meaning parity was unlikely. Traders are pricing in 50 basis points of cuts from the Reserve Bank of Australia while the RBNZ is seen on hold, she said.

The New Zealand dollar touched a four-month high of 51.51 British pence and was recently trading at 51.44 pence from 51.19 pence yesterday. The local currency gained to 92.67 yen from 92.28 yen.