Kiwi at five-year high against Australian dollar on dovish RBA

The New Zealand dollar rose to a five-year high against its Australian counterpart after Reserve Bank of Australia governor Glenn Stevens said there is room both for his currency and interest rates to go lower in the face of subdued domestic demand.

The kiwi climbed as high as 88.11 Australian cents after Mr Stevens gave his speech titled Economic Policy after the Booms, from 87.53 cents immediately before and from 87.27 cents the previous day. It traded at 79.89 US cents from 80.31 US cents at 8am in Wellington and from 80.78 cents a day earlier.

Mr Stevens told the Anika Foundation charity lunch in Sydney that the recent decline in the Australian dollar "seems to make sense from a macroeconomic perspective" and "it would not be a major surprise if a further decline occurred over time".

He also said the central bank has "ammunition" to make a policy response to a weak economy, suggesting he is comfortable cutting interest rates further and potentially adopting unconventional macro-prudential tools.

The speech underlines that the Australian economy is in a different stage of its cycle rom New Zealand's, where the central bank has signalled rates will need to rise, narrowing the gap and yield appeal of the Aussie.

"Clearly, the world was surprised at the degree of dovishness, talking down the currency and throwing in there the potential to ease rates a lot further," says Imre Speizer, senior currency strategist at Westpac Banking Corp.

"The Australian economy isn't going into recession or anything like that – they are just coming off a high," he says. "They're hoping the domestic economy takes the place of the winding down resources sector and they're in a little bit of a transitional zone."

Mr Speizer says he has revised up his target for the kiwi against the Australian dollar to 91 Australian cents ahead of his bank's official upgrade.

Helping to illustrate the difference in the two economies, New Zealand economic figures showed new home building consents were at a five-year high in the second quarter, though the growth was mainly driven by a surge in April, with consents falling in June.

The kiwi traded at 78.55 yen from 78.52 yen this morning and 79.02 yen the previous day and fell to 60.29 euro cents from 60.83 euro cents yesterday. It dropped to 52.13 British pence from 52.51 pence.

The trade-weighted index fell to 75.55 from 75.93.

(BusinessDesk)