Kiwi falls after weak Australian inflation, RBNZ looms

BUSINESSDESK: The New Zealand dollar fell to a five-week low as tepid inflation across the Tasman pared market bets the Reserve Bank of Australia will cut rates at its next meeting, which had been eroding the yield advantage of the Australian currency.

The kiwi fell as low as 78.04 US cents, and dropped to 78.28 US cents at 5pm from 78.59 cents at 8am. The currency was down from 79.18 cents yesterday in Wellington. It fell to 76.50 Australian cents from 76.82 cents yesterday.

Australian annual inflation slowed to a 13-year low 1.2% in the year ended June 30 according to government figures, promoting speculation the central bank won't have to cut rates as aggressively as previously thought.

Traders are giving a rate cut a 31% chance at next month's meeting, down from a 52%chance yesterday, according to the Overnight Index Swap curve. That comes after RBA governor Glenn Stevens delivered an upbeat assessment of Australia's economy yesterday in a speech entitled "The Lucky Country".

"The kiwi has been the whipping boy, falling against all our peers, which reflects pretty aggressive kiwi/Aussie selling," said Mike Jones, currency strategist at Bank of New Zealand in Wellington.

"Australian CPI was not too far from market expectations, but triggered a shift" in whether there will be a rate cut next month.

He said the kiwi may fall further in Northern Hemisphere trading after breaking a key support level today that drew exporters looking to hedge against the currency's strength.

The trade-weighted index dropped to 71.29 from 71.90.

That comes ahead of tomorrow's Reserve Bank of New Zealand monetary policy review, where governor Alan Bollard is expected to keep the benchmark rate unchanged at 2.5%.

Traders will continue to watch headlines in Europe for any update on the health of the Spanish and Italian economies as fears grow about their ability to meet interest repayments. The kiwi fell to 64.82 euro cents from 65.27 cents yesterday.

British gross domestic product figures will also attract attention, with a Bloomberg survey of economists picking the recession dragged on for another quarter in the June period, with a 0.2 percent contraction.

The kiwi fell to 50.45 pence from 50.97 pence yesterday and dropped to 61.18 yen from 61.94 yen.