Kiwi gains against Australian dollar as NZ economy races away

BUSINESSDESK: The New Zealand dollar rose against its Australian counterpart after figures showed the economy grew at its fastest quarterly pace in five years in the first three months of the year.

The kiwi rose to a seven-week high of 78.42 Australian cents at 5pm from 78.04 cents yesterday, and gained to 79.68 US cents from 79.49 cents yesterday.

The currency rose above 80 US cents for the time since May 4.

Government figures showed New Zealand's gross domestic product grew 1.1% in the three months ended March 31, more than twice what the market was expecting, and stoking investors to buy kiwi dollars.

The upbeat data prompted traders to exit bets the Reserve Bank would cut interest rates, and the market has priced in virtually no change to the 2.5% official cash rate over the coming year, according to the Overnight Index Swap curve, removing the expectation of 44 basis points of cuts a fortnight ago.

"The general momentum around the economy is starting to catch up to Australia in the fashion many economists broadly expected," said Mike Jones, currency strategist at Bank of New Zealand.

"There's been pretty decent interest from the speculative community going long on the kiwi" against the Australian dollar, he said, referring to an investing position where you bet an asset it going to gain in value.

The kiwi pared its immediate gains against the greenback as investor sentiment deteriorated on weak Chinese manufacturing figures.

Optimism had already been deflated by the US Federal Reserve's decision to extend its Operation Twist programme, where it sells short-dated government debt to buy longer maturities, rather than embark on a third round of quantitative easing.

Market watchers will keep an eye on the finance ministers' meeting in Luxembourg after Greece's New Democracy and Pasok parties stitched up a coalition government.

Germany is coming under increasing pressure to ease up its stance on retaining tough austerity for nations that need rescuing.

New Zealand's trade-weighted index rose to 71.92 from 71.59 yesterday, and the kiwi gained to 63.42 yen from 62.69 yen.

It advanced to 62.89 euro cents from 62.71 cents yesterday, and increased to 50.82 pence from 50.56 pence.