Kiwi gain slides against Aust after RBA drops key rate to 2.5%

The New Zealand dollar pared gains against its Australian counterpart after the central bank cut interest rates across the Tasman, matching the local key rate, but without indicating if there is scope for further cuts.

The kiwi fell to 87.47 Australian cents at 5pm in Wellington from 87.72 cents immediately before the announcement and 87.53 cents yesterday. The local currency traded at 78.51 US cents from 78.05 cents at 8am and 77.71 cents yesterday.

The Reserve Bank of Australia cut the target cash rate a quarter point to 2.5 percent to help stoke a slowing economy. Governor Glenn Stevens said the economy has been below trend in the past year, and while a weaker Australian dollar has helped, the currency is still over-valued.

Whereas previously he has indicated whether there's scope for another cut, he didn't offer any guidance in today's statement. The Australian dollar rose to 89.70 US cents at 5pm in Wellington from 89.25 cents immediately before the release.

"The market was a bit short and caught - Aussie rates came up a little bit as people had more cuts priced in," said Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney. "That's what's driving the Aussie a little higher."

The local currency recovered after being sold off yesterday amid a food contamination scare at Fonterra Cooperative Group, New Zealand's biggest company. Dairy products account for about a quarter of New Zealand's exports.

Finance Minister Bill English today told Parliament he expects the local economy will only suffer a small hit from the food scare. CBA's Tennent-Brown said tomorrow's GlobalDairyTrade auction will give a good steer on the market's reaction to the news.

Government figures are expected to show New Zealand's unemployment rate increased to 6.3 percent in the June quarter from 6.2 percent in the first three months of the year. The jobless rate came down more than expected in the March quarter.

The local currency rose to 77.11 yen at 5pm in Wellington from 76.76 yen and gained to 51.13 British pence from 50.88 pence. It increased to 59.18 euro cents from 58.54 cents yesterday. The trade-weighted index advanced to 74.37 from 73.81 yesterday.

(BusinessDesk)