Kiwi gains against $A after cash rate cut to 3.75%

BUSINESSDESK: The New Zealand dollar climbed almost half a cent against its trans-Tasman counterpart after the Reserve Bank of Australia slashed half a percentage point from its benchmark interest rate to 3.75%.

The kiwi climbed to 78.82 Australian cents at 5pm from 78.35 cents immediately before the announcement and is up from 78.61 cents yesterday.

It fell to 81.47 US cents at 5pm from 82.20 cents yesterday.

The RBA cut the target cash rate more than expected as a tepid inflation outlook provided scope for easier monetary policy, governor Glenn Stevens said.

"The board judged it desirable that financial conditions now be easier" and that a 50 basis point reduction was "necessary in order to deliver the appropriate level of borrowing rates", he said.

That narrowed the yield advantage Australian interest rates have held over New Zealand rates, making the kiwi more attractive.

The Australian dollar fell to $US1.0340 from $US1.0409 immediately before the release.

"It was a bit of a surprise, but now we have to wait and see whether the banks pass on the cut," said Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney.

"We might get another move down for both currencies when Europe comes on, but it's been a pretty orderly move at this stage."

Chinese government figures showed manufacturing grew for a fifth month in April with the Purchasing Managers' Index up 0.2 points to 53.3.

The reading missed expectations, but remained above 50, which indicates the sector's is expanding.

That soothed concerns the world's biggest economy may be in for a hard landing as it slows down from its rapid growth.

New Zealand employment figures showed labour costs are in check, giving Reserve Bank governor Alan Bollard room to keep interest rates lower for a longer.

The labour cost index rose 0.4% in the first three months of the year, with private sector wage costs up 0.5%.

That comes ahead of Thursday's household labour force survey, which is expected to show New Zealand's unemployment rate stayed at 6.3% in the quarter.

Markets are waiting on US employment figures later this week, with the non-farm payrolls report tipped to show America added 160,000 jobs last month.

The kiwi fell to 65.08 yen from 65.87 yen yesterday, and declined to 72.35 on the trade-weighted index from 72.77.

It dropped to 61.51 euro cents from 62.01 cents yesterday, and decreased to 50.23 pence from 50.47 pence.