Dollar drops vs. Australian dollar after RBA keeps rates on hold, still leaning towards a cut

The New Zealand dollar fell against its trans-Tasman counterpart after the Reserve Bank of Australia kept the target cash rate unchanged, while firming up its bias towards cutting rates if it's needed.

The local currency dropped to 93.80 Australian cents at 5pm in Wellington from 94.27 cents immediately before the release, and from 94.92 cents yesterday. The kiwi rose to 67.39 US cents from 67.29 cents at 8am, and 67.81 cents yesterday.

The RBA kept the key rate at 2 percent, with governor Glenn Stevens saying low rates are needed with tepid inflation and spare capacity in the economy, with board members observing "that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand." Stevens said house price strength in Melbourne and Sydney was showing signs of abating, which had been a concern for the central bank in the past. Traders had priced in a 40 percent chance of a cut before the announcement as private lenders raised mortgage rates in recent weeks to protect their margins in the face of stricter capital requirements, which was seen as adding pressure to the RBA to lower the benchmark rate.

"As expected he made no cut, while maintaining a clear easing bias though - I don't think they want to cut and I also think they'll be happy the Sydney housing is starting to peel off too," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional in Auckland. "The Aussie's had a bit of a bounce up and washed around, but it's still a sell on rallies."

The RBA review comes after the Federal Reserve, Reserve Bank of New Zealand, and Bank of Japan kept their policies unchanged, despite all three meeting seen as potentially being live for a shift.

New Zealand's two-year swap rate rose three basis points to 2.78 percent at 5pm in Wellington, and the 10-year swap gained three basis points to 3.54 percent.

New Zealand house values rose 14 percent in the year ended Oct. 31, the fastest annual pace since March 2006, as the Auckland property market continued to urge despite moves by policymakers to try and slow it down.

Separately, the ANZ commodity price index showed prices for locally produced raw materials rose for a second month, led by the recent rebound in dairy prices.

Traders will be watching the upcoming GlobalDairyTrade auction for a steer on dairy prices, with futures market pricing indicating a decline of between 5 and 10 percent.

The local currency declined to 4.2764 Chinese yuan from 4.2965 yuan yesterday, and was little changed at 81.44 yen from 81.56 yen. It fell to 61.27 euro cents from 61.46 cents, and slipped to 43.76 British pence from 43.93 pence. The trade-weighted index declined to 72.78 from 73.25 yesterday.

(BusinessDesk)