Aussie Drops to 4 1/2-Year Low Versus Kiwi as Rate Bets Diverge

Australia’s dollar touched a 4 1/2-year low versus its New Zealand peer, as the smaller nation’s central bank flagged a need to remove stimulus and drove a divergence in monetary policy prospects for the two countries.

New Zealand’s kiwi dollar rose against all of its 16 major counterparts after Reserve Bank Governor Graeme Wheeler said that a removal of monetary easing “will likely be needed in the future” following a policy review today, prompting bets for an increase in borrowing costs as early as January 2014. The Aussie slid as traders increased bets the Reserve Bank of Australia will cut its overnight cash rate target next month.

“New Zealand’s Reserve Bank has told us that they’re going to tighten explicitly, no ifs or buts, while the RBA remains with an easing bias,” said Imre Speizer, a markets strategist at Westpac Banking Corp. (WBC) in Auckland. “That’s as clear a divergence as you have between two close central banks. The pressure from the markets would be to the upside for the kiwi currency, particularly against the crosses.”

The Australian dollar declined 0.8 percent to NZ$1.1454 as of 4:52 p.m. in Sydney, after earlier touching NZ$1.1453, a level unseen since November 2008. Westpac sees the currency falling to NZ$1.11 in the coming months, Speizer said. The Aussie was little changed at 91.70 U.S. cents. Its New Zealand counterpart climbed 0.9 percent to 79.99 U.S. cents.

The kiwi has risen 0.7 percent this year, according to Bloomberg Correlation-Weighted Indexes. Its Australian counterpart has fallen 9 percent, the biggest decline after the yen among the 10 developed-nation currencies tracked by the gauges.

Housing Impact

The New Zealand central bank kept its Official Cash Rate at a record-low 2.5 percent today. The pace of future interest-rate increases will depend on the booming housing market’s impact on prices, the RBNZ said.

“Although removal of monetary stimulus will likely be needed in the future, we expect to keep the OCR unchanged through the end of the year,” Wheeler said in a statement in Wellington today.

The nation’s two-year swap rate, a fixed payment made to receive floating rates that is sensitive to interest-rate expectations, rose 12 basis points, or 0.12 percentage point, to 3.32 percent, the highest close since September 2011.

‘Digestive Issues’

“The market reaction is a reminder that the removal of policy stimulus in an environment of low interest rates elsewhere is going to cause some digestive issues,” ANZ Bank New Zealand Ltd. economists Cameron Bagrie and Sharon Zollner wrote in an e-mailed note to clients today. “We struggle to pencil in any more than a couple of OCR moves in 2014.”

Traders see a 53 percent chance RBNZ’s Wheeler will raise borrowing costs to 2.75 percent or higher by the January 2014 policy review, up from 17 percent odds yesterday, interest-rate swaps data compiled by Bloomberg show. There’s a 75 percent probability RBA Governor Glenn Stevens and his board will lower the country’s key rate by 25 basis points to 2.5 percent at their next meeting on Aug. 6., according to the data.

Barclays Plc is “narrowly favoring” a quarter-percentage point reduction to Australia’s cash rate next month, from a previous forecast for no change.

“The currency remains a wildcard, however, in that a further steep fall in the Australian dollar could see the RBA hold its fire,” Sydney-based chief economist Kieran Davies and Singapore-based currency strategist Hamish Pepper wrote in an e-mailed note to clients today. The lender, the U.K.’s second-largest by assets, sees the Aussie falling to 86 cents in 12 months, according to the report.

Australia’s 10-year bond yield rose for a third-straight day and touched 3.78 percent, the highest since July 16. The rate on three-year bonds advanced five basis points to 2.66 percent.

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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