Australia Dollar Heads for 1st Loss in 6 Weeks on NAB Writedown

By Ron Harui and Candice Zachariahs

July 25 (Bloomberg) -- The Australian dollar headed for its first loss in six weeks after National Australia Bank Ltd. increased provisions for losses on U.S. debt derivatives. The New Zealand dollar was poised for a second weekly decline.

Australia's dollar fell to the lowest in two weeks after the nation's largest bank by assets boosted provisions for collateralized debt obligations by A$830 million ($795 million), raising concern that U.S. subprime-mortgage losses are spreading to Australia. New Zealand's dollar slipped to a six-month low on speculation the central bank will keep lowering interest rates.

``The news may spur worries that the U.S. subprime-mortgage crisis is adversely affecting the Australian banking sector,'' said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. ``This is negative for the Aussie.''

Australia's dollar fell to 95.61 U.S. cents at 11:21 a.m. in Sydney, from 96.18 cents late in Asia yesterday and 97.03 cents in New York on July 18. It earlier reached 95.40 cents, the weakest since July 10. The currency, known as the Aussie, dropped to 102.52 yen, from 103.63 in Asia yesterday and 103.75 yen in New York a week ago. It earlier touched 102.40 yen, the lowest since July 17.

Against the U.S. dollar, the Aussie declined for a third day along with the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials, which slid to its lowest since May 6.

Commodity Exports

Gold, the nation's third most-valuable commodity export, fell as a stable U.S. dollar eroded demand for the precious metal. Exports of metals and other raw materials contribute 17 percent to Australia's economy.

New Zealand's dollar declined to 74.17 U.S. cents from 74.27 cents in Asia yesterday and 76.12 cents in New York on July 18. It earlier touched 73.87 cents, the lowest since Jan. 22. The currency, known as the kiwi, fell to 79.53 yen from 80.03 yen yesterday and 81.40 yen a week ago. It earlier reached 79.45 yen, the weakest since May 16.

The Australian currency slipped to a one-week low against the yen after Melbourne-based National Australia Bank said in a statement today its A$1.2 billion portfolio of collateralized debt obligations is now 90 percent provisioned. The bank had set aside A$181 million in March to cover possible CDO losses.

`Unprecedented Conditions'

``This provision reflects the unprecedented conditions in global credit markets and, in particular, the rapid deterioration in the U.S. housing market,'' John Stewart, the bank's chief executive officer, said in the statement.

Benchmark interest rates are 7.25 percent in Australia and 8 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., making the two South Pacific nations a favorite target for so-called carry trades.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency market moves erase those profits.

The New Zealand dollar fell to a six-month low against the U.S. dollar and a two-month low versus the yen after the Reserve Bank of New Zealand reduced interest rates yesterday for the first time in five years.

The kiwi extended its losing streak to eight days after RBNZ Governor Alan Bollard said the central bank ``would expect to lower rates further'' to boost an economy on the brink of recession.

``The risks for the New Zealand dollar remain skewed to the downside,'' wrote Sophia Drossos, a New York-based currency strategist at Morgan Stanley, in a research note yesterday. ``Investors are likely to roll forward expectations for cuts and perhaps increase expectations for a 50-basis-point ease in September.''

New Zealand Rates

The New Zealand dollar has lost 8.7 percent since reaching 82.13 U.S. cents in March, the highest since being allowed to trade freely 23 years ago.

Traders are betting the RBNZ will cut its benchmark interest rate by 134 basis points in the next 12 months, compared with 129 basis points yesterday, according to a Credit Suisse Group index based on interest-rate swaps. A basis point is 0.01 percentage point.

Australian government bonds gained for a third day. The yield on the 10-year security fell 13 basis points to 6.27 percent. The price of the 5.25 percent note maturing in March 2019 advanced 0.927, or A$9.27 per A$1,000 face amount, to 92.151. Yields move inversely to prices.

New Zealand's government bonds rose, pushing the yield on the 10-year note down 2 basis points to 6.11 percent. The price of the 6 percent security maturing in December 2017 climbed 0.147 to 99.201.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.