The New Zealand dollar rose to a 2.5-year high against the Australian dollar before the Reserve Bank of Australia's monetary policy review tomorrow, while largely ignoring Prime Minister John Key's comment that the kiwi is overvalued against the greenback.
It rose as high as 81.39 Australian cents, the highest since July 2010, and traded at 81.10 Australian cents at 5pm in Wellington from 81.22 cents on Friday in New York. It traded at 84.56 US cents at 5pm from 84.53 cents last week.
The RBA is expected to keep the target cash rate at 3 percent when the board reviews the benchmark rate tomorrow. That comes ahead of new forecasts, which may initiate a future cut if the projections show the world's 12th biggest economy is slowing down as its resources boom crests a peak.
"That cross-rate is very interest rate sensitive," says Peter Dragicevich, currency strategist at Commonwealth Bank of Australia in Sydney. "Expectations the RBA could do further policy easing will help the kiwi to outperform the Aussie in the near-term."
The RBA's cash rate is 50 basis points higher than New Zealand's benchmark interest rate.
At his weekly post-cabinet press conference, Mr Key, a former FX trader, said the kiwi is "a bit overvalued" against the greenback, "but the Australian dollar at 81 cents is not far out of the trading band".
New Zealand's Treasury department expects to see improved economic growth in the fourth quarter and first quarter, according to its latest monthly update. The domestic economy is expected to piggy-back on the Canterbury rebuild as it ramps up this year, and is also being supported by strong prices for raw materials.
The ANZ Commodity Price Index today showed locally produced raw materials attracted 10-month high prices, led by gains in pelts, logs and skim milk powder, rising 0.3 percent last month.
The kiwi may extend its rally this week as investors continue to search out higher returns, with five strategists surveyed by BusinessDesk picking a bias to the topside of a 83.50 US cents to 85.50 cents trading range.
The local currency was almost unchanged at 78.39 yen from 78.38 yen on Friday in New York, and inched up to 62.02 euro cents from 61.97 cents. It traded at 53.87 British pence from 53.86 pence last week.
The trade-weighted index was at 76.16 at 5pm in Wellington from 76.13 last week.