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Australian dollar inches higher

The Australian dollar edged slightly higher on Thursday, after a US dollar sell-off and mildly positive domestic employment data afforded the local unit a day of respite from recent declines.
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However, divergent economic fortunes continued to fuel a slide in the local unit against its New Zealand pair.

In late local trade, the Aussie was fetching US83.25¢, compared with US83.15¢ at the same time on Wednesday. The currency did hit a high of US83.76¢ just after the November jobs data release, but retreated after closer inspection revealed worrying trends in youth unemployment and under-employment.

The dominance of part-time work in job creation also points to further hits to household income, according to analysis by Morgan Stanley.

“Although unemployment growth is running at 0.7 per cent a month on a three-month annualised basis, hours worked are again falling, reflecting a mix shift from full- to part-time work,” the investment bank said in a note.

Even still, most commentators said there was nothing in the data to support calls for cuts in the Reserve Bank of Australia’s cash rate next year, although some maintain that they point to further economic weakening next year.

In contrast, central bank language on future rate rises in New Zealand on Thursday helped drive the Aussie to its lowest level against the Kiwi dollar in five months.

In late local trade, the Australian dollar was fetching $NZ1.07, compared with $NZ1.08 at the same time on Wednesday, and a year-to-date high of $NZ1.13 at the end of October. In early trade it touched $NZ1.06

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 at 3.5 per cent for the third policy meeting in a row, as expected, but accompanied the decision with less dovish language than forecast among some sectors of the financial community.

While acknowledging that further hikes would be “required at a later stage”, the RBNZ also said that the “expansion can be sustained for longer than previously expected with a more gradual increase in interest rates”, given subdued inflationary pressures.

Bank of New Zealand currency strategist Raiko Shareef said currency traders had been pricing in an end to tighter monetary policy, while credit markets had better anticipated RBNZ guidance.

“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 guidance on an end to monetary tightening from the RBNZ.

“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 RBNZ’s continued tightening bias runs counter to that of the RBA, which a growing band of economists expect to cut interest rates next year. At the very least, according to less bearish commentators, the cash rate will stay on hold until late next year or early 2016.

ANZ currency strategist Sam Tuck said the distinct policy directions reflected divergent economies.

“The RBNZ is still expecting a rate hike; they see growth on or above trend through 2016, compared with the market pricing in a full rate cut by the RBA,” he said. “A lot of people had been expecting a convergence in the outlook between Australia and New Zealand, and there was reasonable amount of positioning on that view which has been cleaned out,” he said.

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