New Zealand Dollar, Australian Dollar Climb High, Investors Exercise Caution

The Australian dollar and New Zealand dollar climbed to their respective month highs as investors became cautious ahead of the scheduled 2-day policy meeting of the U.S. Federal Reserve which is expected to begin the slowdown of its massive stimulus program.

The Australian dollar dropped to $0.9300 to $0.9317 in early trade. The Aussie dollar pulled away from its three-month of $0.9400 on Sept 16. The recent Australian dollar movement was a muted reaction to the Reserve Bank of Australia's policy meeting. The RBA has previously announced it will still be open to slash interest rates although the bank showed no signs of urgency.

The Australian dollar has increased to more than 3 per cent since the last few weeks of August. Foreign exchange markets have concluded that the Reserve Bank of Australia has become more neutral on policy. The RBA had expressed hope that the dollar will fall further to back up the domestic economy.

The exchange rate between the Australian dollar and U.S. dollar has increased to more than 3 cents since the RBA last had its meeting. Alvin Pontoh, a strategist at TD Securities in Singapore, said that unless this will be reversed, it might reintroduce an explicit easing bias.

Most economists agreed that the RBA will declare another interest rate cut by the end of 2013 as the Reserve Bank is expected to boost non-resource sectors to replace the mining boom as an economic stimulus.

The New Zealand dollar traded at $0.8170 from $0.8234 on Sept 16, a figure not seen since the middle of May 2013. The recent Kiwi dollar is mostly credited to the weakness of the U,S, dollar, following the news of Lawrence Summers' withdrawal from the U.S. Federal Reserve leadership race.

If leading candidate, Janet Yellen, would get the position, investors are banking that U.S. monetary policy will remain easier for a longer time.

New Zealand government bonds went down to send yields of 2.5 basis points. The Australian government bond futures also slumped to its three-month low. It was down to 96.900 which crept closer to its low at 96.800 last March 2013.