Kiwi hits new five-year high as it nears 89 Australian cents

The New Zealand dollar approached 89 Australian cents this morning as investors favoured the reviving local economy over investment in Australia, where it is slowing.

The kiwi touched a new five-year high of 88.98 Australian cents and recently traded at 88.87 cents from 88.30 cents at the 5pm market close in Wellington yesterday. The local currency was little changed at 79.84 US cents from 79.77 cents yesterday.

The kiwi has surged 12 percent against the Australian dollar this year as the rebuilding of earthquake-damaged Christchurch, rising house prices and high dairy prices underpin confidence and spending, bolstering the local economy and signalling higher interest rates.

In contrast, Australia's economy is slowing as the mining boom comes off the boil, meaning rates are headed lower.

"The Australian dollar has been under a lot of pressure," says Kevin Morgan, a senior dealer at OM Financial. "We have got two central banks diametrically opposed."

Pressures in the New Zealand economy "keep the Reserve Bank on guard for higher rates, and with the Australian bank certainly set to cut rates in the next few months, the kiwi/aussie will go above 90 cents and possibly beyond in the next two to three months," he says.

The Australian dollar extended its decline after Reserve Bank of Australia governor Glenn Stevens this week said there is room for the currency and interest rates to go lower in the face of subdued domestic demand.

Traders are pricing in a 97 percent chance he will cut the 2.75 percent benchmark interest rate at a meeting on Tuesday.

The kiwi has advanced since Reserve Bank of New Zealand governor Graeme Wheeler last week flagged that inflationary pressures from housing and construction are likely to push up interest rates.

Traders see zero chance the bank will raise the official cash rate from 2.5 percent at its next review on September 12. However, they are pricing in 71 basis points of hikes in the next 12 months, according to the Overnight Index Swap curve.

"It is not surprising to see the kiwi outperform," Mr Morgan says. "We are probably the only major central bank in the world in rate hike mode so the kiwi looks set to outperform."

The kiwi edged up against the US dollar after the Federal Reserve overnight maintained its $US85 billion in monthly bond purchases and said that persistently low inflation could hamper the expansion. Some traders had expected the Fed to signal when it would start to taper the programme.

"We didn't get anything for the dollar bulls from the Federal Reserve last night so I think until we get some sort of tapering coming from the States, kiwi/US could definitely trade back up towards the topside so I expect at least another test of 81 cents, possibly 82 cents," Mr Morgan says.

Today, traders will be eyeing the official Chinese PMI, which is expected to dip under 50, showing a contraction in manufacturing amid concern about a slowdown in the world's second-largest economy.

The Bank of England and the European Central Bank are today expected to keep interest rates near zero and reiterate plans to keep monetary policy accommodative.

The kiwiwas little changed at 78.19 yen, 60.02 euro cents and 52.50 British pence. The trade-weighted index was 75.59 from 75.49 yesterday.

(BusinessDesk)