The New Zealand dollar rose above 91 Australian cents after inflation figures across the Tasman were slightly weaker than expected, while the greenback remained out of favour as demand for risk-sensitive assets trumps the prospect of higher US interest rates.
The kiwi jumped to 91.36 Australian cents 90.59 cents immediately before the inflation release and up from 90.54 cents yesterday. The local currency gained to 73.77 US cents from 73.15 cents yesterday.
The Australian dollar dropped about a quarter of a US cent after Bureau of Statistics figures showed consumer prices rose at an annual pace of 1.9 per cent in the December quarter, a touch below the 2 per cent pace predicted by economists.
Meanwhile, the greenback remained out of favour after US President Donald Trump's state of the union address did little to rattle markets hungry for riskier assets with large institutional investors rebalancing their portfolios for the end of the month.
"The CPI print was a small miss, but a miss none-the-less," ANZ Bank New Zealand senior economist Philip Borkin said. "That started it (the kiwi's gain against the Australian dollar), but then we had the month-end rebalancing as well so that probably exacerbated the move."
Investors will be watching the Federal Open Market Committee's policy review, where Federal Reserve chair Janet Yellen makes her final appearance before handing over the reins to Jerome Powell.
While the FOMC isn't expected to make any change, rhetoric on the pace of inflation and interest rate outlook will be keenly watched, despite the decoupling between the prospect of rising US rates and the greenback.
Borkin said eventually higher US rates will have to drive the greenback higher, and he said the kiwi's current level look stretched. Still, he anticipates the kiwi will test 74.50 US cents in the Northern Hemisphere session on demand for risk-sensitive assets.
New Zealand's two-year swap rate slipped 1 basis point to 2.15 per cent, while 10-year swaps decreased 1 basis point to 3.24 per cent.
The trade-weighted index advanced to 75.09 from 74.56. The kiwi rose to 80.33 yen from 79.78 yen yesterday and gained to 4.6614 Chinese yuan from 4.6331 yuan. It increased to 59.37 euro cents from 59.12 cents yesterday and traded at 52.03 British pence from 52.07 pence.