Kiwi may gain against $A on expectations of RBA rate cut

The New Zealand dollar may gain against its Australian counterpart if the Reserve Bank of Australia cuts interest rates as expected, as the resources boom slows across the Tasman and forces the regulator to reduce its yield advantage.

The kiwi increased to 78.78 Australian cents at 8am in Wellington from 78.68 cents yesterday, and advanced to 82.10 US cents from 81.95 cents.

Traders have almost fully priced in a 25 basis point rate cut when the RBA reviews monetary policy today, giving it a 93% chance, according to the Overnight Index Swap curve.

The bank has to contend with a slowing mining sector, which propped up the world's 12th biggest economy during the global financial crisis and its after-effects. If it cuts the target cash rate to the expected 3% that will reduce its yield advantage over New Zealand to half a percentage point.

"The RBA is not necessarily going to tell the market it's using the cash rate as a tool to control the currency, but it's part of their strategy," says Dan Bell, currency strategist at HiFX in Auckland. "I'm surprised the kiwi hasn't got higher [against the Australian dollar] already."

Today's RBA meeting comes two days before New Zealand's central bank governor Graeme Wheeler reviews monetary policy, when he is expected to keep the official cash rate at 2.5%. Traders are pricing in an 18% chance for a rate cut.

The euro rose to a six-week high after Greece offered to buy back 10 billion euros in bonds as the Mediterranean nation pursues its austerity goals after securing sweeter terms for its regional rescue package. The kiwi was little changed at 62.86 euro cents from 62.84 cents yesterday.

Investors are still sweating over US legislators' ability to put aside partisan leanings and reach a compromise to scale the fiscal cliff of $US607 billion of automatic tax hikes and spending cuts that kick in on January 1.

The currency traded at 67.48 yen from 67.53 yen yesterday and declined to 50.99 British pence from 51.09 pence. The trade-weighted index was almost unchanged at 73.33 from 73.32 yesterday.

(BusinessDesk)