The New Zealand dollar advanced against the Australian dollar as Australia's central bank mulls intervention to pull down its currency on concern it will stymie economic growth.
The kiwi touched a high of 89.94 Australian cents overnight, and traded at 89.69 cents at 8am in Wellington, from 89.60 cents at 5pm yesterday. The local currency edged lower to 81.91 US cents from 82.39 cents yesterday.
The Australian dollar has weakened as Australia's Reserve Bank talks about possible currency intervention to bring the value of the Aussie down. RBA deputy governor Philip Lowe yesterday reiterated comments by governor Glenn Stevens last week that the bank is ready to intervene.
"There is some talk that the RBA is potentially already in the market intervening anyway," said Stuart Ive, senior client advisor, foreign exchange and derivatives at OM Financial. "They are threatening to do it, the fact is maybe they are actually intervening."
"The main trend line that we are looking at in the kiwi/Aussie at the moment is 90.90 on the upside, a break of that would certainly raise some fears that that cross pair could go back to the heady highs of 94.50 that we saw many years ago," Ive said.
Also supporting the selloff in the Aussie, Ive said Goldman Sachs overnight said it now expects the RBA to cut its benchmark 2.5 percent interest rate in March. Goldman Sachs sees no further RBA changes in 2014 and no rate rises until early 2015.
By contrast, New Zealand's central bank is expected to hike rates by about 100 basis points over the next year, according to the Overnight Swap Curve.
"The two central banks are in two very different courses and Australia still remains a massive trading partner of ours and that certainly could cause a few issues for us going forward," Ive said. "I don't see the RBNZ backing down on their talk of hiking early next year and equally I think the economy in Australia certainly is suffering now.
"The kiwi/Aussie could be marching back towards that 94.50 area which for an exporting country it will certainly have an increasing impact and exporters need to be aware that they need to perhaps take out some insurance cover for the potential of that being played out."
In New Zealand today, traders will be eyeing a 10:45am report on October overseas trade which is expected to provide further evidence of a post-drought rebound in dairy production.
The New Zealand dollar dropped to 60.39 euro cents from 60.87 cents yesterday after China's central bank governor Zhou Xiaochuan said the euro was important to his nation's reserve management, showing the euro may benefit from central banks seeking to diversify their dollar holdings.
Also helping buoy the euro, European Central Bank official Benoit Coeure said inflation should pick up gradually. Traders are awaiting Europe's latest inflation report on Friday after last month's reading showed inflation at a four-year low.
The kiwi slid to 82.97 yen from 83.59 yen after minutes of the Bank of Japan's meeting last month showed some officials saw risks to the outlook for the economy. The local currency slipped to 50.58 British pence from 50.98 pence yesterday. The trade-weighted index weakened to 76.93 from 77.34 yesterday.