Dollar extends drop vs AU dollar after Australian inflation accelerates; Reserve Bank looms

The New Zealand dollar extended its decline against its trans-Tasman counterpart after Australian government figures showed annual inflation accelerated to its fastest pace in four years, and ahead of the Reserve Bank of New Zealand's interest rate review tomorrow.

The kiwi fell to 91.97 Australian cents at 5pm in Wellington from 92.27 cents immediately before the report, and 92.36 cents yesterday. The local currency traded at 86.78 US cents at 5pm from 86.67 cents at 8am and 86.74 cents yesterday.

Australia's annual trimmed mean inflation rate increased to 2.9 percent in the June quarter, according to the Bureau of Statistics, and ahead of the 2.7 percent pace expected. The faster pace of consumer price increases reduces the likelihood of another rate cut by the Reserve Bank of Australia, and may diminish the yield advantage New Zealand has over its neighbouring nation.

"Aussie CPI was much stronger than expected," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "We possibly may have seen the multi-year highs in that kiwi/Aussie cross."

The data comes ahead of tomorrow's monetary policy review by New Zealand's central bank. Governor Graeme Wheeler is expected to hike the official cash rate a quarter-point to 3.5 percent, the fourth increase since he embarked on tightening policy earlier this year in a bid to clamp down on inflationary pressures.

Westpac's Speizer said Wheeler will probably signal a pause in the tightening cycle at tomorrow's meeting, which might prompt some movement in the kiwi dollar, although "a lot of that is already priced in."

Finance Minister Bill English reiterated his view the kiwi is "unsustainably high" telling BusinessDesk on the sidelines of a Trans-Tasman Business Circle lunch in Wellington that "almost anyone who has looked at it comes to the conclusion it's somewhere 10 to 15 percent overvalued."

The trade-weighted index was little changed at 80.81 from 80.77 yesterday. The local currency gained to 64.45 euro cents at 5pm in Wellington from 64.13 cents yesterday, and traded at 50.82 British pence from 50.78 pence. It was little changed at 87.99 yen from 88.01 yen yesterday.

(BusinessDesk)

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NZ Market Snapshot

Forex

Sym Price Change
USD 0.8012 0.0052 0.65%
AUD 0.9077 0.0006 0.07%
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GBP 0.4952 0.0024 0.49%
HKD 6.2173 0.0415 0.67%
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NI225 15115.3 15115.3 15111.2 -1.66%