By Ron Harui and Tracy Withers
June 26 (Bloomberg) -- The Australian and New Zealand dollars climbed after the U.S. Federal Reserve gave no indication when it will begin raising interest rates after leaving them unchanged yesterday.
``The Fed has moved to neutral and maybe wasn't as aggressive as some had expected,'' said Alex Sinton, senior currency trader at ANZ National Bank Ltd. in Auckland. ``The Australian dollar has moved higher and dragged the kiwi with it,'' he said, calling New Zealand's currency by its nickname.
Australia's dollar rose to 96.02 U.S. cents, the highest since June 10, before trading at 95.92 U.S. cents at 12:42 p.m. in Sydney from 95.53 cents late in Asia yesterday. It has gained 5.1 percent this quarter and 9.6 percent this year.
New Zealand's dollar climbed to 75.74 U.S. cents from 75.60 cents late in Asia yesterday. It earlier reached 76.03 cents, the strongest since June 23. It has fallen 3.6 percent this quarter and 1.1 percent this year.
Fed Rate Bets
The Australian currency gained for a third day after Fed policy makers kept borrowing costs at 2 percent and said that ``uncertainty'' about the inflation outlook remains high. While economists were unanimous that the Fed would leave rates unchanged, some traders were expecting policy makers to signal that rates may need to rise.
Futures contracts on the Chicago Board of Trade show a 66 percent chance the Fed will hold the target rate for overnight lending between banks unchanged at the September meeting, compared with 10 percent odds the previous day. There's a 94 percent probability the Fed will keep rates on hold at its August meeting.
Benchmark interest rates are 7.25 percent in Australia and 8.25 percent in New Zealand, compared with 2 percent in the U.S. and 0.5 percent in Japan, making the Australian and New Zealand currencies favorites for the so-called carry trade.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.
`Through to Parity'
``We've got cash rates at 7.25 percent, so the currency really is one of the highest-yielding currencies around the globe,'' said Martin Lakos, division director at Macquarie Private Wealth in Sydney, in a Bloomberg Television interview. ``It is possible that it'll move through to parity,'' he said referring to the Australian dollar against the U.S. dollar.
Australia's dollar climbed as high as 103.65 yen, the most since Nov. 9, from 103.13 yen late in Asia yesterday. The currency has gained 13.8 percent this quarter and 5.9 percent this year against the yen. New Zealand's dollar rose to 81.77 yen from 81.60 yen. It has appreciated 4.4 percent this quarter, limiting its drop this year to 4.5 percent.
New Zealand's dollar pared today's advance after a government report showed the nation's current-account deficit narrowed less than economists expected in the first quarter as payments to foreign investors accelerated.
The gap shrank to NZ$13.79 billion ($10.5 billion) in the 12 months ended March 31 from NZ$13.84 billion in the year through December, Statistics New Zealand said in Wellington today. The median estimate of 12 economists surveyed by Bloomberg News was for a NZ$13.32 billion shortfall.
`Midst of Recession'
``There is a risk, with the economy in the midst of a recession, that investors could lose confidence in New Zealand's ability to meet its obligations, which is a big negative for the currency,'' said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney.
A separate government report tomorrow may show New Zealand's economy contracted 0.3 percent in the first three months of the year, according to the median forecast of 13 economists surveyed by Bloomberg News. Seven of the economists said the economy may also shrink in the second quarter, pushing New Zealand into its first recession since 1998.
Australian 10-year government bonds declined. The yield on the 10-year note rose 3 basis points, or 0.03 percentage point, to 6.51 percent, according to data compiled by Bloomberg. The price of the 5.25 percent bond maturing in March 2019 fell 0.2, or A$2.00 per A$1,000 face amount, to 90.383.
New Zealand government debt were little changed. The yield on the 10-year note was unchanged from yesterday at 6.42 percent and the three-year yield held at 6.48 percent. Bond yields move inversely to prices.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net.
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