N.Z. Dollar Falls as Economy Shrinks; Australian Dollar Weakens

By Lilian Karunungan and Chris Young

June 27 (Bloomberg) -- The New Zealand dollar fell after a government report signaled the economy may enter a recession, adding to speculation the central bank will cut interest rates from a record high this year. The Australian dollar declined.

The New Zealand currency headed for a weekly loss as the data showed the economy contracted for the first time in two years last quarter, spurring traders to add to bets the Reserve Bank of New Zealand will slash its benchmark borrowing cost from 8.25 percent. The Australian and New Zealand currencies weakened the most in seven weeks versus the yen as a slump in stocks spurred investors to sell higher-yielding assets funded in Japan.

``We're bearish on the New Zealand economy and expect the RBNZ to cut rates 1 percentage point this year,'' said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation's largest lender. ``We'll probably see the kiwi grind lower today on risk aversion,'' he said, referring to the currency by its nickname.

New Zealand's currency bought 75.42 U.S. cents at 1:03 p.m. in Wellington compared with 75.55 cents before the report was released and 75.77 cents in late Asian trading yesterday. The local dollar fell 1.3 percent to 80.59 yen.

The Australian dollar slid 1.3 percent to 102.14 yen in Sydney compared with 103.44 yesterday in late Asia trading yesterday. The currency traded at 95.56 U.S. cents from 95.99 yesterday.

GDP Figures

New Zealand's dollar has fallen 4.5 percent this quarter and 2.4 percent this year against the U.S. currency on signs the highest borrowing costs of any nation with a credit rating of Aaa has slowed demand in the economy and cooled inflation.

Gross domestic product fell 0.3 percent from the fourth quarter, when it gained a revised 0.8 percent, Statistics New Zealand said in Wellington today. That matched the median estimate of 13 economists surveyed by Bloomberg News. The economy expanded 1.9 percent from a year earlier.

Seven economists expect the economy also shrank in the second quarter, pushing New Zealand into its first recession since 1998.

The central bank will cut the rate by 1.25 percentage points in the next 12 months, according to Credit Suisse Group calculations based on the trading of interest-rate swaps. That compares with 1.22 percentage points yesterday.

The Australian currency ended a three-day advance against the U.S. dollar and yen as the Standard & Poor's 500 Index tumbled the most in three weeks, sapping demand for so-called carry trades. Australia's dollar fell from a seven-month high against Japan's currency as U.S. stocks headed for their worst June since the Great Depression on concern credit-market writedowns and record oil prices will weaken the economy.

Carry Trade

``Risk-aversion and carry-trade unwinding was the dominant theme,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``We suspect that the Australian dollar will be pressured into month-end.''

The Australian dollar is a favorite of carry trades because the nation's 7.25 percent benchmark interest rate compares with 0.5 percent in Japan. In the strategy, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that exchange rate changes will wipe out the returns from the interest-rate advantage.

New Zealand government bonds gained for a third day after the report, pushing the benchmark 10-year yield down 4 basis points to a three-week low of 6.37 percent, according to data compiled by Bloomberg. The price of the 6 percent bond maturing in December 2017 rose 0.3, or NZ$0.30 per NZ$1,000 face amount, to 97.4. Bond yields move inversely to prices.

Australian government bonds gained. The yield on the 10- year bond fell 8 basis points, or 0.08 percentage point, to 6.43 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.599, or A$5.99 per A$1,000 face amount, to 90.960.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Chris Young in Sydney at cyoung12@bloomberg.net.