The guy, in the first place, is only joking around when he asks her, "Am I cute?"
She is basically saying "Stop being silly." Whether she thinks the guy with pony tails is cute is NOT expressed/implied in her remark.
OK, "Kawaii" in this dialogue, in her line, more specifically, is NOT used as an adjective. It represents his question, "Ore kawaii/Am I cute?". That's why I wrote it the way I did in my last post ("Kawaii?" ja nai jan!).
This is a very colloquial expression and I doubt it makes an apearance in any text books. I will give a couple of more examples.
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(....bonehelm failed his English exam for the second time and now faces a possibility of having to repeat his junior year. He comments as he eats a piece of cake as if being held back a year is not that big a deal.)
bone :
Kono keeki, oishii ne~
Kyle :
"oishii ne~" ja nai yo! ryuunen ga douiu mono ka omae wa wakatteru no!?"
bone :
Man! This cake is da shiznit!!
Kyle :
"DA SHIZNIT!?" Do you even know what being held back a year means!?
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(......Kyle is prancing around in his sister's Catholic school uniform pretending he is a young girl as his friend Chidori looks on...)
Kyle :
Ge!! Kono burausu, sukesuke ja~n! Bura tsukenai to Kyle-chan no oppai ga miechau~! ASHIKAGA ni miraretara doushiyou~~~!
Chidori :
"Doushiyou~~~?" ja ne~yo! Baka ka, omae wa!?
Kyle :
OMG! This blouse is see-through! If I don't wear a bra, they can see Kyliekin's pompoms! What if ASHIKAGA saw them!? Oh no~~~
Chidori :
"Oh, noooo~"!? (He is mocking Kyle by repeating his line) Are you an idiot!?
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OK, I was bored and went a bit overboard with the examples. I hope it made some sense.