Kiwi gains on Aussie dollar after pleasant inflation surprise

BUSINESSDESK: The New Zealand dollar gained against its trans-Tasman counterpart after tepid first-quarter inflation figures stoked expectations the Reserve Bank of Australia will cut interest rates next month, heightening the appeal of the local currency.

The kiwi climbed to 79.10 Australian cents at 5pm from 78.71 cents immediately before the release and 78.80 cents yesterday.

It fell to 81.19 US cents from 81.32 cents at 8am and was down from 81.54 cents yesterday.

Australia’s consumers price index rose just 0.1% in the March quarter, says the Bureau of Statistics, slower than the 0.6% forecast by economists leading up to the release and giving annual inflation of 1.6%.

That has lifted expectations the RBA will cut its 4.25% target cash rate next month.

Traders are pricing in 111 basis points of cuts to the cash rate over the coming 12 months, according to the Overnight Index Swap curve, which would narrow the 175 basis point yield advantage Australia currently holds over New Zealand.

“It’s pretty much a shoo-in we’ll get a 25 basis point cut in May from the RBA, if not more,” Imre Speizer, market strategist at Westpac Banking, said.

The kiwi is “probably going to resume its upward trend and should take out 80 Australian cents in the next week or two”.

With New Zealand closed for the Anzac Day public holiday tomorrow, markets will wait for Reserve Bank governor Alan Bollard to review monetary policy on Thursday.

Economists expect the Reserve Bank to keep the official cash rate on hold at 2.5%, and Mr Speizer said the market is now pricing in the first rate hike in July next year.

Continued uncertainty over sovereign debt issues in Europe have kept investors wary of risk-sensitive assets, such as the trans-Tasman currencies, and he said they will stay “under pressure” for the time being.

He estimates the kiwi is overvalued by 3.8 US cents, and should be trading at about 77.44 US cents.

That is in line with AMP Capital estimates, with head of investment strategy Keith Poore telling a media briefing in Wellington the kiwi’s fair value is probably in the high 70s against the US dollar.

The kiwi has been trapped in a 2 US cents range for the past seven weeks, the longest time since a 10-week stretch in September/October 2006.

That leaves it open to an extreme movement when it breaks out of the range, Mr Speizer said.

The kiwi was little changed at 61.71 euro cents from 61.79 cents yesterday, and fell to 50.35 pence from 50.56 pence.

It declined to 65.62 yen from 66.41 yen yesterday, and decreased to 72.47 on the trade-weighted index from 72.73.