[SYDNEY] New Zealand's dollar surged to the highest level since May 2015 after traders deemed the central bank's decision to cut borrowing costs was insufficiently dovish amid the global ardour for yield that's been spurred by unprecedented global monetary easing.
The Australian currency rose to near a three-month high. The Aussie and the kiwi have each gained more than one per cent this month as their respective central banks reduced benchmark interest rates a quarter point to record lows, but did little to indicate a willingness to ease policy again soon.
The US dollar has retreated to a seven-week low after last Friday's better-than-expected jobs data left traders maintaining bets that the Federal Reserve won't tighten policy until next year.
"Australia and New Zealand yields remain attractive in a low rate world," said Jason Wong, a currency strategist at Bank of New Zealand in Wellington.
"There'd still be upward pressure on the currencies even with rate cuts and that has been an ongoing theme since the start of the current easing cycle. The US outlook and in particularly the prospect of Fed policy tightening remains the key for the two currencies."
The Reserve Bank of New Zealand lowered its official cash rate by a quarter point to 2 per cent and published bank-bill forecasts indicating just one more reduction was in the pipeline.
All sixteen economists surveyed by Bloomberg had expected the RBNZ to reduce by a quarter point. The futures market indicated on Wednesday that traders were certain of a reduction and even saw 20 per cent odds for a 50 basis point drop.
The Reserve Bank of Australia and RBNZ prefer weaker currencies to stoke inflation back into their respective target bands. Two rate reductions by the Australian central bank since May and six by its antipodean neighbour haven't weakened exchange rates as their benchmark borrowing costs remain well above those of their peers, attracting foreign investment.
The kiwi climbed 1.1 per cent to 72.84 US cents as of 10:30 am in Singapore, after jumping as much as 1.9 per cent to 743.41 after the RBNZ announcement.
The two-year swap rate jumped two basis points to 2 per cent. The Aussie rose 0.2 per cent to 77.15 US cents and is at levels not seen since before the May rate reduction.
After saying in his policy statement that a decline in the kiwi dollar "is needed," Mr Wheeler conceded in a news conference in Wellington that the RBNZ had "very limited influence" over the exchange rate. He also said he hadn't given serious consideration to a half-point reduction because it wasn't warranted and, in a "normal" situation, the RBNZ would probably be raising rates to cool the rampant housing market.
Australian 10-year bonds offer a 35 basis points yield spread over their US equivalent, up from a low of 26 basis points Aug 2. New Zealand 10-year bonds yielded 63 basis points more than similar American notes.
"Markets remain in strong yield-seeking mode," Robert Rennie, Westpac Banking Corp's global head of foreign exchange and commodity strategy said.
"Both the Australian dollar and the New Zealand dollar appear well supported for now."