N.Z. Dollar Falls to Seven-Year Low Against Aussie on Rate View

By Ron Harui and Candice Zachariahs

July 22 (Bloomberg) -- The New Zealand dollar declined to a seven-year low against the Australian dollar and dropped for a fifth day versus the U.S. currency on speculation the Reserve Bank of New Zealand will cut interest rates this week.

New Zealand's currency, known as the kiwi, fell for a fourth day versus Australia's on prospects that an RBNZ rate reduction will diminish the allure of higher-yielding assets on offer in the South Pacific nation. The yield premium on three- year Australian government bonds over similar-maturity New Zealand debt widened to 29 basis points from 28 points yesterday.

``People looking for higher yields in any medium-term vehicle are more attracted to Australia than New Zealand,'' said Tony Allen, head of currency trading in Wellington at ANZ National Bank Ltd. ``When there's a chance of easing, traditionally the kiwi's gone down aggressively in the week leading up to the announcement.''

New Zealand's dollar fell to NZ$1.2851 per Australian dollar, the lowest since December 2000, before trading at NZ$1.2813 as of 6:30 p.m. in Wellington from NZ$1.2805 late in Asia yesterday. The currency dropped to 76.12 U.S. cents from 76.27 cents. It weakened to 81.11 yen from 81.37 yen.

Australia's dollar traded at 97.54 U.S. cents, from 97.66 cents late in Asia yesterday. It reached 98.49 cents on July 16, the highest level since 1983. The currency traded at 103.94 yen from 104.21 yen.

`Cut Hanging Over'

The kiwi extended this month's decline against Australia's dollar to 1.9 percent as investors increased bets over the past month that the RBNZ will reduce rates for the first time since 2003 when it meets July 24.

``The prospect of a rate cut hanging over the New Zealand dollar continues to shift high-yield investor funds toward the Australian dollar,'' Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney, wrote in a research note today.

The chance of a quarter-percentage point cut at the RBNZ's next meeting was 48 percent today, compared with 28 percent a month ago, according to a similar Credit Suisse index based on interest-rate swaps.

RBNZ Governor Alan Bollard said on June 5 that it's likely he will cut the official cash rate this year as the economy slows. A government report yesterday showed consumer spending on debit, credit and store cards fell in June, adding to signs of cooling economic growth.

Gold, Commodities

Australian dollar traded near a 25-year high against the U.S. currency as gold, the nation's third-most valuable commodity export, climbed as rising energy prices boosted demand for the metal as a hedge against inflation.

``Generally with all commodities doing better overnight, that's helped the Australian dollar,'' said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., the nation's fourth-largest bank.

The price of gold rose 1.1 percent after crude oil advanced 1.7 percent yesterday. Exports of raw materials contribute about 17 percent to Australia's economy.

The Aussie was also bolstered before an inflation report tomorrow that may support the case for the Reserve Bank of Australia keeping rates at a 12-year high.

Australian Inflation

Australia's consumer price index rose 1.3 percent in the second quarter for an annual gain of 4.3 percent, up from 4.2 percent in the previous three months, according to the median estimate of 22 economists surveyed by Bloomberg News. The Bureau of Statistics releases the data at 11:30 a.m. in Sydney tomorrow.

The benchmark interest rate is 7.25 percent in Australia and 8.25 percent in New Zealand. There is a zero percent chance of an RBA rate move at its next meeting on Aug. 5, according to a Credit Suisse Group index based on interest-rate swaps.

New Zealand's government debt declined, pushing the yield on the 10-year note up 8 basis points to 6.18 percent. The price of the 6 percent security maturing in December 2017 slipped 0.563 to 98.720. Yields move inversely to prices. A basis point is 0.01 percentage point.

Australian government bonds dropped, pushing the yield on the 10-year security up 5 basis points to 6.47 percent, according to data compiled by Bloomberg. The price of the 5.25 percent bond maturing in March 2019 decreased 0.355, or A$3.55 per A$1,000 face amount, to 90.711.

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