The New Zealand dollar rose to a three-week high against the Australian dollar overnight as investors bet the fundamentals for the kiwi are more favourable than for its Australian counterpart this year.
The kiwi touched 92.98 Australian cents overnight and was trading at 92.76 cents at 8am in Wellington, from 92.50 cents at 5pm yesterday. The local currency edged up to 82.77 US cents from 82.62 cents yesterday.
The New Zealand dollar has advanced 16 percent against the Aussie the past year as a reviving local economy contrasts with a slowdown in Australia, increasing the yield appeal of local assets. New Zealand's Reserve Bank is expected to raise interest rates as early as this month while Australia could cut rates this year, prompting investors to place so called "long" bets on the kiwi, anticipating it will rise against the Aussie.
"Offshore fund managers put on some of their bets for the year in the first week in January, so obviously long kiwi short Aussie is still going to be the preferred trade at this stage," said Tim Kelleher, head of institutional FX sales New Zealand at ASB Bank. "We are definitely seeing demand for New Zealand fixed income in the first week of January already from offshore. We are outperforming."
ASB's Kelleher expects the cross rate to push higher towards 93.50 to 94 Australian cents ahead of the Reserve Bank of New Zealand interest rate decision on Jan. 30.
Traders anticipate there is a 44 percent chance New Zealand's Reserve Bank will raise its 2.5 percent benchmark interest rate at this month's meeting, according to the Overnight Index Swap Curve.
A report early this morning showed dairy product prices fell 0.8 percent in the first GlobalDairyTrade auction for 2014, led by skim milk powder while rennet casein made a new record high.
Despite the fall, dairy prices remain highly elevated from year ago levels and New Zealand commodity prices continue to provide support for the New Zealand dollar, Kymberly Martin, markets strategist at Bank of New Zealand, said in a note.
Today, the focus will be on the US with the release of the minutes from the Federal Reserve's meeting last month and the latest ADP private sector employment report.
The New Zealand dollar slipped to a four-day low of 60.56 euro cents overnight after a report showed core Eurozone inflation remains weak at 0.7 percent. The kiwi was trading at 60.78 euro cents at 8am from 60.63 cents at 5pm yesterday ahead of reports today on Eurozone retail sales and unemployment.
The local currency advanced to 50.43 British pence from 50.38 pence yesterday and rose to 86.50 yen from 86.37 yen. The trade-weighted index rose to 78.35 from 78.19 yesterday.