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NZ dollar touches 3-week high vs. Aussie on divergent interest rate paths

The New Zealand dollar hit a three-week high against the Aussie after New Zealand's Reserve Bank reiterated that interest rates are expected to remain on hold for "some time", in the same week that Australia cut its rate following moves lower by many other central banks.

The kiwi touched 95.08 Australian cents, and was trading at 94.91 cents at 8am in Wellington, from 94.86 cents at 5pm yesterday. The local currency slipped to 73.68 US cents from 74.05 cents yesterday as commodity currencies declined after oil prices dropped following a report that showed US inventories were at record levels.

Reserve Bank governor Graeme Wheeler, in the bank's traditional scene-setting major speech to start the year, said yesterday that keeping interest rates on hold at 3.5 percent for now was more prudent than contemplating a cut. That contrasts with the outlook in Australia, where its central bank this week reduced the benchmark rate to a record low 2.25 percent and where further reductions are expected. Finance Minister Bill English noted this week that 14 central banks have dropped their interest rates over the past couple of weeks.

"In a world where central banks are racing to the bottom to lower interest rates, holding rates is now the 'new hawkish' which will attract investors hungry for yields," Matt Simpson, senior market analyst at ThinkForex in Melbourne, said in a note. "The divergence between the two economies should continue for 'some time' but with the RBA expected to lower rates quite soon, I expect the downside move (in the Aussie) to increase with momentum."

Simpson has previously said he expects the cross rate to reach parity this year.

"For the parity scenario to become less likely we would need to see RBNZ lower rates and possibly intervene again to weaken their currency whilst RBA stand pat at 2.25 percent cash rate," he said in the note. "For now, I see this as an unlikely scenario."

New Zealand markets are closed tomorrow for the Waitangi Day public holiday.

On Friday, traders globally will focus on the latest US employment data which is expected to show non-farm payrolls climbed 231,000 last month, while the unemployment rate held at 5.6 percent.

The New Zealand dollar fell to 4.6029 yuan from 4.6269 yuan yesterday after The People's Bank of China joined others around the world in adopting a more accommodative policy stance, to bolster its economy. The POBC cut its reserve requirement ratio by 50 basis points to 19.5 percent for large financial institutions, which is expected to inject $600 billion yuan into the banking system, helping lower firms' funding cost.

The kiwi fell to 48.44 British pence from 48.86 pence yesterday, weakened to 86.49 yen from 87.30 yen and was little changed at 64.53 euro cents from 64.59 cents. The trade-weighted index weakened to 76.35 from 76.57 yesterday.