Parity party on hold as NZ dollar tumbles

The Australian dollar has been under pressure against most currencies since the RBA renewed its easing bias early this year in the wake of sharply lower iron ore prices. Photo / Thinkstock

Currency drops after market expectation of cut to Aussie cash rate fails to materialise.

Hopes of the New Zealand dollar equalling the Australian currency were dashed yesterday after the Reserve Bank of Australia failed to live up to market expectations and left its official cash rate unchanged at 2.25 per cent, sending the cross rate tumbling.

But the RBA, in its statement, left the door open for more rate cuts.

"Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target," the bank said.

By late in the trading day, the New Zealand dollar had fallen to A97.87c, down from A99.10c just before the RBA's 4.30pm announcement and nearly A2c down from its record high on Monday of A99.78c.

ANZ senior foreign exchange strategist Sam Tuck said the cross rate reacted when the RBA did not live up to market expectations.

"It has been a pretty wild ride up, so a little bit of volatility is understandable," Tuck said.

The New Zealand dollar had been close to parity with the Australian dollar for weeks as speculation grew that the RBA would again cut its rate after moving in February, which would have further widened the interest rate differential between the two countries.

The Reserve Bank of New Zealand's (RBNZ) official cash rate stands at 3.5 per cent and is not expected to change any time soon.

While the market had started to price in a rate cut from the RBA, economists were more circumspect.

In a Bloomberg poll of 30 economists, 17 had predicted no change to the rate, while the markets had priced in a 70 per cent chance of a cut. Foreign exchange strategists were not ruling out another stab at parity in the months ahead.

The Australian dollar has been under pressure against most currencies - the New Zealand dollar included - since the RBA renewed its easing bias early this year in the wake of sharply lower iron ore prices.

Economists said the New Zealand dollar's strength on the cross rate over the last few months reflected divergent paths of the two economies and the interest rate differential.

Australia's economy has been hit hard by sharply lower commodities prices, while New Zealand's has remained relatively resilient, despite soft dairy prices.

"The easing bias remains for the RBA, which means the RBA and the RBNZ are still on divergent paths," Tuck said.

The New Zealand dollar has also been strong against the euro - for similar reasons. The European Central Bank has embarked on a quantitative easing programme to try to rejuvenate the eurozone, putting the euro under downward pressure against most major currencies and elevating the kiwi.

But against the main currency benchmark - the US dollar - the kiwi has declined, trading yesterday at US75.5c compared with just over US88c early last year, reflecting the greenback's renewed strength as the United States emerges from the shadow of the global financial crisis.