Australian, N.Z. Dollars Weaken Against Yen as Stocks Decline

By Ron Harui and Candice Zachariahs

July 8 (Bloomberg) -- The Australian and New Zealand dollars fell against the yen as slumping equity markets eroded demand for higher-yielding assets funded in Japan's currency.

The two currencies ended two days of gains versus the yen as Fannie Mae and Freddie Mac, the largest U.S. providers of home-mortgage financing, slid to the lowest in more than 13 years on concern they will be forced to raise more capital. Australia's dollar declined the most in a week as the difference in yield, or spread, between two-year Australian and Japanese bonds narrowed to the least in six weeks.

``Rising risk aversion with volatility and losses on the U.S. stock market hit the Aussie quite hard,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney.

The Australian dollar declined 0.7 percent to 102.24 yen as of 1:58 p.m. in Sydney, from 102.91 yen late in Asian trading yesterday. It slipped 0.3 percent versus the U.S. dollar to 95.48 U.S. cents.

New Zealand's dollar fell 0.7 percent to 80.50 yen, and weakened 0.3 percent to 75.20 U.S. cents. It touched 75.03 U.S. cents, the lowest level since June 16.

The Standard & Poor's 500 Index dropped 0.8 percent yesterday, extending its plunge from an October record to more than 20 percent. The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, reached 26.91, the highest level since March 24.

Benchmark Rates

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 dollars popular targets for so-called carry trades.

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

``Worsening investor-risk appetite appeared to weigh on the Australian dollar, as investors trimmed carry trades,'' John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney, wrote in a note to clients.

The Australian dollar declined for a third day against the U.S. currency as an industry report showed business confidence fell to the lowest level in seven years as cooling domestic demand and rising raw-material costs eroded corporate profits.

The confidence index dropped to minus 9 points in June from minus 4 in May, according to a National Australia Bank survey of 335 companies. The reading was the lowest since the Sept. 11, 2001, U.S. terrorist attacks.

Three-Week Low

The New Zealand dollar traded near the lowest level in three weeks against the U.S. currency after an industry report showed profit expectations declined to the least in 25 years.

The currency also fell for a third day versus the U.S. dollar as the report from the New Zealand Institute of Economic Research backed speculation the economy has slipped into a recession after shrinking in the first quarter. The New Zealand dollar fell against 10 of the 16 most-traded currencies as traders added to bets the central bank will cut interest rates from a record high in coming months.

The report ``is consistent with the idea that New Zealand is stepping into a period of slow growth and possibly a recession,'' said ANZ's Morriss. ``It has put the kiwi back under pressure,'' he said, referring to the local currency by its nickname.

Twenty-three percent of firms surveyed said domestic trading will decline over the next three months compared with 10 percent in the previous poll, the Institute said in Wellington. A net 40 percent of 923 businesses surveyed last month said profits will fall, the most since December 1982.

Rate Cut `Likely'

Reserve Bank of New Zealand Governor Alan Bollard said last month it is ``likely'' he will cut the official cash rate from 8.25 percent, the highest of any nation with an Aaa credit rating. Two of 13 economists surveyed by Bloomberg News expect a reduction to 8 percent at the next meeting on July 24.

Traders are betting the RBNZ will cut borrowing costs by 1.33 percentage points in the next 12 months, according to a Credit Suisse Group index based on interest-rate swaps. That compares with 1.25 percentage points yesterday.

Australian government bonds rose. The 10-year yield fell 2 basis points to 6.33 percent, according to data compiled by Bloomberg. The price of the 5.25 percent bond due March 2019 gained 0.113, or A$1.13 per A$1,000 face amount, to 91.677.

New Zealand government bonds also advanced, with the yield of the 10-year note falling 2 basis points to 6.29 percent.

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