The New Zealand dollar rose to a record against the Australian dollar as investors favour the outlook for the local economy, increasing the possibility the two currencies may reach parity.

The kiwi hit 96.77 Australian cents, beating its previous post-float high of 96.52 touched last month, and was unchanged at 96.34 cents at 8am in Wellington, from its level at 5pm yesterday. The local currency slipped to 74.81 US cents from 75.05 cents yesterday.

The kiwi has gained 3 per cent against the Aussie so far this month after the Reserve Bank of Australia cut interest rates to a record low 2.25 per cent while New Zealand's central bank signalled rates were likely to remain on hold at 3.5 per cent. Investors were buoyed by strong New Zealand retail sales and services data yesterday, and all eyes will now be on the GlobalDairyTrade auction overnight as prices for New Zealand's largest commodity export improve, while in Australia iron ore prices remain subdued.

"It's really the divergent external and internal views of the two economies," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand. "While that dynamic continues it's pretty hard to see the New Zealand dollar underperforming the Australian dollar which is what would be required for it to head back in the other direction, and it's fairly easy to construct cases where the New Zealand dollar continues to outperform."

Advertisement

The kiwi may advance further as investors favour selling the Aussie against the US dollar, rather than the kiwi, he said.

"It doesn't show many signs of stopping at the moment," said the ANZ's Tuck. "In the next couple of months, it's highly possible that we hit parity. It's only three big figures away and that's not far in foreign exchange at all."

Still, Tuck said the kiwi was unlikely to remain completely decoupled from the Aussie, as Australia is our second-largest trading partner and is also exposed to our largest trading partner, China.

Looking ahead, the cross rate is likely to be driven by Fonterra Cooperative Group's GDT auction, with ANZ expecting prices to climb higher on lower volume.

The Reserve Bank of Australia's minutes to its last meeting, scheduled for release today, are unlikely to provide much new information, said ANZ's Tuck.

The New Zealand dollar rose to 66.01 euro cents from 65.71 cents yesterday, gained to 48.75 British pence from 48.62 pence and slipped to 88.58 yen from 88.85 yen. The trade-weighted index was at 77.71 from 77.74 yesterday