NZ dollar heads for 1.2 percent weekly gain vs. Aussie as interest rates diverge

The New Zealand dollar is heading for a 1.1 percent weekly gain against its Australian counterpart as the differing fortunes for the neighbouring economies underscore the divergent track for each country's interest rates.

The kiwi rose as high as 92.46 Australian cents this week, a new five-year high, trading at 92.01 cents at 5pm in Wellington from 90.95 cents at the start of the week, and 91.63 cents yesterday. It was little changed at 82.37 US cents at 5pm from 82.43 cent at 8am and down from 82.67 cents yesterday.

New Zealand central bank governor Graeme Wheeler yesterday firmed up the prospect of interest rate hikes next year, saying the bank's forecasts indicate the 2.5 percent official cash rate will be raised by 2.25 percentage points over the next two-and-a-quarter years to head off inflationary pressures. At the same time, Australia's dollar came under pressure as Reserve Bank governor Glenn Stevens said a weaker currency was preferable to lower interest rates to inject life into a sagging economy.

The different stances by the respective central banks underline the view New Zealand's key rate will soon be higher than in Australia. The yield on New Zealand 10-year government bonds was 4.87 percent at 5pm in Wellington, 53 basis points higher than its Australian equivalent.

"Interest rates have as good as priced in an awful lot of action for next year," said Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney. "That's going to keep it pretty strong, and it could go even stronger when they actually deliver" a rate hike, he said.

The kiwi dollar is heading for a 0.5 percent weekly decline against the US dollar, opening at 82.81 US cents on Monday, with investors waiting for next week's Federal Reserve policy review for a steer on when the central bank intends to scale back its asset purchases.

A BusinessDesk survey of 11 traders and strategists on Monday predicted the local currency would trade between 80.80 US cents and 84.50 cents this week. Nine expected the currency to advance while two said it might drop.

The local currency was little changed at 59.88 euro cents at 5pm in Wellington from 59.92 cents yesterday and slipped to 50.37 British pence from 50.52 pence. It advanced to 85.49 yen from 84.73 yen yesterday. The trade-weighted index was at 77.65 from 77.59 yesterday.

(BusinessDesk)