Dollar drops vs Australian dollar after RBA keeps cash rate at 2%

The New Zealand dollar dropped half a cent against its Australian counterpart after the Reserve Bank of Australia kept the cash rate at a record low, saying it will await future data will inform the board on whether current policy will keep its growth and inflation targets intact.

The kiwi fell to 92.62Ac at 5pm in Wellington 93.13 cents immediately before the release, and little changed from 92.69Ac yesterday. The kiwi traded at 71.13USc from 70.83USc at 8am and 71.02USc yesterday.

The RBA held the target cash rate at 2%, saying low interest rates were warranted to support borrowing and spending as weak capital expenditure weighs on economic growth. Governor Glenn Stevens said the board decided to leave the rate after last month's cut, and will assess economic and fiscal data over the coming year on "whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target." Mr Stevens noted the Australian dollar had depreciated against the greenback but was more muted in other crosses. The Australian dollar rose to 76.72USc at 5pm from 76.26USc immediately before the release.

"They need the Aussie dollar lower, they see the rate remaining stimulatory for the time being – it's essentially everything we already know," said Stuart Ive, senior dealer foreign exchange at OMF in Wellington.

The kiwi has traded between 91.65-94.45Ac over the past month, and "we could see it contained within those ranges for the time being unless we've misinterpreted the [New Zealand] Reserve Bank's intentions," he said.

Traders are pricing in a 52% chance the Reserve Bank will cut the 3.5% official cash rate when it reviews policy next week to further stimulate a slowing economy and moribund inflation.

New Zealand's two-year swap rate increased to 3.33% at 5pm in Wellington from 3.30% yesterday, and the 10-year swap rate rose to 3.88% from 3.87%.

Government data today showed New Zealand's terms of trade rose 1.5% in the first quarter as a slump in imported petrol prices offset weaker dairy exports. Traders will get an update on the health of the dairy sector at Fonterra Cooperative Group's GlobalDairyTrade auction on Tuesday in the US. Fonterra, the world's biggest exporter, trimmed its forecast farm-gate payout for the current season to $4.40 a kilogram of milk solids.

US employment data on Friday in Washington will be the major event this week as investors gauge how soon the Federal Reserve will start raising interest rates, while traders are also watching for the outcome of negotiations between Greece, its lenders, the European Union and International Monetary Fund with a repayment of the Mediterranean nation's bailout due this week.

The kiwi rose to 65.04 euro cents at 5pm in Wellington from 64.71c yesterday, and increased to 46.77p from 46.43p. It gained to 88.63 yen from 88.09 yen yesterday, and advanced to 4.4099 Chinese yuan from 4.4014 yuan. The trade-weighted index rose to 74.68 from 74.46 yesterday.

(BusinessDesk)