The New Zealand dollar is on a 5-year high as it approached 89 Australian cents on August 1 as investors banked on New Zealand's economy over Australia where the nation is currently experiencing an economic slowdown.
The Kiwi dollar traded at its newest five-year high of 88.98 Australian cents before dipping slightly at 88.87 cents. It was up from 88.30 cents as of the Wellington's market close in July 31. The Kiwi dollar slightly gained against the U.S. dollar at 79.84 cents from 79.77 cents.
The New Zealand dollar soared 12 per cent against the Australian dollar in 2013 due to the rehabilitation of earthquake-damaged Christchurch, increasing house prices and dairy products. These helped bring back investor confidence to boost the economy and pave the way for higher interest rates.
Unlike New Zealand, the Australian economy is slowing down as the mining boom continues to fade. The Reserve Bank of Australia's plans of cutting rates further in August affected the market and saw a decline in the Australian dollar.
OM Financial's senior dealer, Kevin Morgan, said the Australian dollar has been subjected to a lot of pressure. The central banks of New Zealand and Australia are diametrically opposed.
Mr. Morgan said the New Zealand dollar was expected to go beyond the 90-cent mark in the remaining months of 2013.
The New Zealand dollar has increased since the Reserve Bank of New Zealand Governor Graeme Wheeler flagged inflation from housing and construction. These sectors are expected to push interest rates higher.
Mr Morgan said it was not surprising to see the New Zealand dollar surge higher than the Australian dollar. He believed New Zealand has probably the only central bank with high interest rates. This sets the background for the Kiwi dollar to outperform.
The New Zealand dollar moved higher against the U.S. dollar after the Federal Reserve retained its monthly bond purchases worth $US85 billion. Investors are on the lookout for China's economic data which is expected to show movement in manufacturing despite concerns about an economic slowdown.
The European Central Bank and the Bank of England are expected to keep interest rates low at near zero per cent.
Declining Aussie dollar
The Australian dollar fell below the U.S. 90-cent mark for the first time since September 2010 as economic data from the U.S. and an announcement from the Federal Reserve gave investors mixed signals. The Australian dollar dropped to U.S. 89.82 cents from U.S. 90.16 cents when the U.S. Commerce Department reported an American economic growth of 1.7 per cent in the June quarter. The Federal Reserve also announced it would maintain its economic stimulus plan.