Kiwi holds near 12-month high as traders split on RBA rate cut

Markets are giving Australia's central bank a 66% chance of cutting its 3.5% target cash rate tomorrow.

(BusinessDesk) The New Zealand dollar held near a 12-month high against its Australian counterpart ahead of tomorrow's Reserve Bank of Australia meeting, with traders divided on whether the central bank will cut interest rates.

The kiwi rose as high as 80.08 Australian cents today, the highest since September last year, and traded at 79.99 cents at 5pm in Wellington, up from 79.88 cents at the close of trading last week. The currency fell to 82.70 US cents from 82.82 cents at 8.30am in Wellington, and down from 82.97 cents on Friday in New York.

Markets are giving Australia's central bank a 66% chance of cutting its 3.5% target cash rate tomorrow, according to the Overnight Index Swap rate.

Australia has been fighting a two-speed economy as its service-dominated states lag behind the resources boom in Western Australia, though a slowdown in international demand for hard commodities has started to drag on that sector as well.

By contrast, demand continues for New Zealand's food-based commodities.

"We view the kiwi/Aussie cross as targeting 81 Australian cents, then up to 82 cents, on the basis that food prices continue to hold up reasonably well, while industrial metals continue to look more average," says Dan Bell, currency strategist at HiFX in Auckland.

"If they don't cut the rate tomorrow, that would be a short-term boost for the Australian dollar."

New Zealand growth has slowed in the second half of this calendar year on a deteriorating manufacturing sector and weak exports and consumer spending, according to Treasury.

The government's financial adviser says there is a risk that growth in the September quarter may be less than the 0.6% expected in its latest monthly update.

Trading in the local session was relatively quiet with several Australian states out for the Labour Day holiday and Chinese markets closed for the start of Golden Week. Stocks markets were mixed across Asia, with Japan's Nikkei 225 index down 1.2% in afternoon trading and Hong Kong's Hang Seng up 0.4%.

Investor sentiment was subdued after weaker-than-expected US data and amid speculation Spain may face a downgrade to its investment grade Baa3 credit rating with Moody's Investors Service. The yield on Spain's benchmark 10-year government bond fell 1.3 basis points to 5.949%.

The kiwi moved little at 64.50 euro cents from 64.47 cents on Friday in New York, and was unchanged at 51.27 British pence. It fell to 64.40 yen from 64.58 yen last week and slid to 73.76 on a trade-weighted basis from 73.91.