By Mark Mulligan
The New Zealand dollar on Thursday soared to its highest level in five months against its Australian counterpart after the country's central bank softened its inflation outlook, but confirmed a bias towards higher interest rates.
In mid-morning trade the Aussie was fetching $NZ1.06, compared with $NZ1.08 at the same time on Wednesday, and a year-to-date high of $NZ1.13 at the end of October.
Reserve Bank of New Zealand left the official cash rate unchanged for the third policy meeting in a row.
The Kiwi currency was last this strong against its trans-Tasman pair in mid-July.
The latest surge came after the Reserve Bank of New Zealand left the official cash rate unchanged for the third policy meeting in a row, as expected, but accompanied the decisions with slightly less dovish language than expected among some sectors of the financial community.
While acknowledging that further hikes would be "required at a later stage", the RBNZ also acknowledged that the "expansion can be sustained for longer than previously expected with a more gradual increase in interest rates", given subdued inflationary pressures.
The bank also referred to the local currency as "unjustifiably and unsustainably high", and not reflecting the decline in commodity prices this year.
Bank of New Zealand currency strategist Raiko Shareef said currency traders had been pricing in even less hawkish comments on monetary policy, while credit markets had interpreted them more literally.
"The rates markets had the most sensible reaction, in my mind, to what happened, which is essentially that the RBNZ lowered its expected future path of interest rates, as one would expect given the developments we've had in global inflation over the past three months or so," he said.
"So the rates market actually rallied a little bit, which is what you would have expected."
In contrast, he said, foreign exchange traders had expected two pieces of bearish news this week: a sharp forecast downgrade from dairy giant Fonterra, and guidance on an end to monetary tightening from the RBNZ.
In the event, Fonterra's outlook was as expected, and the central bank stopped short of a pivot to neutral policy.
"There was some speculation that the bank might go completely soft on rates and say, 'right, we're done'," said Mr Shareef.
"That was the bit that didn't happen, and that probably disappointed some in the speculative community which expected a much sharper sell-off."
The surprise also served to firm up the Kiwi dollar against its US counterpart after months of decline. It also coincided with an end to the greenback rally, with most currencies retracing some of their recent losses against the US unit in the last 24 hours.
TD Securities' head of Asia-Pacific research Annette Beacher said RBNZ jawboning of the currency also seems to have run its course.
"The New Zealand dollar was just under US0.77 cents heading into the announcement and jumped to US0.78," she noted.
"Perhaps the phrase 'the exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high' is losing impact."
The RBNZ's continued tightening bias runs in sharp contrast to that of the Reserve Bank of Australia, who a growing band of economists expect to further cuts interest rates next year. At the very least, according to less bearish commentators, the cash rate will stay on hold until late last year or early 2016.
Despite this, commentators say the Kiwi has probably overshot against the Aussie.
"We have a forecast of $NZ1.09 for Aussie-Kiwi into early 2015.
"Unless commodity prices deteriorate considerably from here, we've probably seen the lows for Aussie-Kiwi broadly," he said.