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 dollar 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 Reserve Bank of Australia reviews monetary policy today, giving it a 93 per cent chance, according to the Overnight Index Swap curve.
The RBA 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 the RBA cuts the target cash rate to 3 per cent as expected, that will reduce its yield advantage over New Zealand to half a percentage point.
"The RBA's 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," said Dan Bell, currency strategist at HiFX in Auckland. "I'm surprised the kiwi hasn't got higher (against the Australian dollar) already."