NZ dollar falls after Aussie trade deficit surprise

BUSINESSDESK: The New Zealand dollar fell in local trading after a bigger-than-expected Australian trade deficit sapped demand for the trans-Tasman currencies ahead of the federal budget tonight.

The kiwi fell to 79.30 US cents at 5pm from 79.44 cents at 8am and was little changed from 79.20 cents yesterday. The trade weighted index decreased to 70.93 from 71.03.

he currency fell to 77.84 Australian cents from 78.21 cents yesterday.

Australia's imports outpaced exports by $A1.59 billion in March, according to the Bureau of Statistics, a wider deficit than the A$1.3 billion predicted in a Bloomberg survey of economists.

That prompted traders to sell the Australian dollar, which fell to $US1.0181 from $US1.0211 immediately before the release, ahead of Treasurer Wayne Swan's annual federal budget.

Mr Swan has pledged to deliver a $A1.5 billion surplus this year and a $A2 billion surplus next year.

The trade deficit "was a touch weaker than what the market was looking for, and that took its toll on the Aussie, and hence the kiwi", said Mike Jones, currency strategist at Bank of New Zealand.

"There's some pretty solid demand [for the kiwi] from exporters who are committed to buy the dip."

Investors remained nervous about Europe amid speculation the Spanish government will have to bail out its ailing bank sector after Bankia SA chairman Rodrigo Rato resigned yesterday.

That comes after general elections over the weekend threw up a new French president who isn't keen on the region-wide budget cuts, and a hung Parliament in Greece.

Traders will be watching for any comment by Reserve Bank governor Alan Bollard about the strength of the currency at tomorrow's six-monthly financial stability report.

Though the report doesn't relate to monetary policy, the bank has used its release as an opportunity to talk down the currency in the past.

The market is betting the Reserve Bank will cut 36 basis points from the 2.5% official cash rate over the next 12 months, according to the Overnight Index Swap curve.

Mr Jones said the currency's weakness might not last with interest rate markets pricing in at least one rate cut by the Reserve Bank, and if that's not delivered rising interest rates will attract buyers to the kiwi.

The two-year swap rate rose 2.5 basis points to 2.45% today, but is still lower than the benchmark OCR, which is linked to the 90-day bank bill rate.

The kiwi rose to 63.44 yen from 64.19 yen yesterday, and fell to 60.84 euro cents from 61.06 cents yesterday.

It was little changed at 49.02 pence from 49.10 pence.