Aussie cash rate rise catches NZ on hop

The New Zealand dollar was sent sprawling against its Australian counterpart after the Reserve Bank of Australia wrong-footed many market players yesterday when it lifted its official cash rate by 25 basis points to 5.75 per cent.

The kiwi had been trading around the A84.13c mark before the announcement at 11.30 yesterday morning and plummeted to as low as A83.36c immediately afterward, threatening the A83.20c four-year low it hit three weeks ago.

Closing at A83.54c, the kiwi is now more than 12c below the A95.55c post-float high it hit in November last year.

ANZ senior dealer Mark Elliott said the kiwi looked certain to head lower still against the currency of New Zealand's largest trading partner.

"It's in a fairly steep down trend. My bet would be over the next month or so we're going to head to somewhere between A80c and A81c. What happens from there, who knows?"

Despite polls showing a majority of economists had expected no change, Sydney-based Royal Bank of Canada currency strategist Sue Trinh said it had been an even-money bet heading into yesterday's decision by the Reserve Bank of Australia (RBA).

The Royal Bank of Canada did not expect another cash rate increase in the current cycle as Australia's household sector was highly leveraged and consumer confidence was expected to collapse in coming months thanks in part to high oil prices.

"We look at the tightening today as more of a case of fine-tuning and any more tightening by the RBA will be done simply by jawboning which is something the RBA has been very good at over the past year."

Despite yesterday's fall, Trinh did not expect the kiwi-aussie cross to break through the A83.20c mark soon: "It's bottomed out there multiple times over the past couple of months so we'll continue to respect that."

She said New Zealand Reserve Bank Governor Alan Bollard had reiterated that he did not expect the bank to ease rates at all this year and Royal Bank of Canada believed he would stay true to his word.

"A83.20c will support it for now and on the top side A85.40c will cap it. There's not likely to be a lot of additional information that can shake it out of its current range.

"Longer term, I think the risks are heavily skewed towards that A80c region. The RBNZ, once it does begin its easing cycle, will have to cut aggressively whereas that contrasts with a stable RBA monetary policy. Long-term pressure is on the kiwi-aussie cross to trade lower."

However, like ANZ's Elliott, BNZ currency strategist Danica Hampton expected the kiwi to reach fresh four-year lows sooner rather than later.

"We should see it test A83.20c in the coming couple of weeks," she said.

Against the greenback yesterday, the kiwi was up 0.63c to US64.08c. Hampton believed it would remain stable, at least in the near term. "I do expect we'll see some consolidation in the next month or two in that US62c to US64c range but eventually we'll see it break out to the downside and continue to see it trend lower against the US dollar."