High flying kiwi dollar leaves Aussie in the dust

The New Zealand dollar was perched near four-month peaks on Friday having out flown all competitors this week as a run of upbeat economic data and a favourable ruling on bank capital gave it a major lift on its Australian peer.

The kiwi dollar was last at $0.6543, having touched a top of $0.6562 on Thursday. That left it 1.8% higher for the week so far, the best performance since early September.

The Aussie dollar was flat at $0.6835 and up almost 1.1% for the week, although that was largely due to US dollar weakness rather than its own strength.

Indeed, Australian data this week has been mostly dismal with third-quarter growth disappointing and the current quarter looking no better.

New Zealand's figures have been a complete contrast with everything from retail sales to business sentiment to the terms of trade beating forecasts.

The government also plans to announce a significant increase in infrastructure spending later this month, using low borrowing costs to stimulate growth.

All of this led investors to scale back the chance of more rate cuts from the Reserve Bank of New Zealand, while narrowing the odds on easing by the Reserve Bank of Australia (RBA). Market pricing now implies only a 16% chance of an RBNZ cut in February, compared to 58% for the RBA.

The divergence of fortunes has seen the Aussie skid to a one-month trough on the kiwi at NZ$1.0416, having shed four cents in as many weeks.

"Australia's domestic economy is weak, while New Zealand's economy appears to have reached an encouraging turning point, and is improving," said Richard Grace, chief currency strategist at CBA.

"AUD/NZD has depreciated below the current 200-day moving average of NZ$1.0574 and is set to further depreciate to NZ$1.0350." He noted Australian one-year overnight indexed swap (OIS) rates, which essentially map where the market thinks the cash rate is heading, had declined to 39 basis points below those in New Zealand. Kiwi 10-year bond yields were also up a steep 18 basis points on the week, against 10 basis points for Aussie paper. The Aussie bond currently yields 37 basis points less than the Kiwi, compared to 11 basis points early this month.

Australian three-year bond futures were off 1.5 ticks on Friday at 99.300, a drop of 5 ticks for the week.