Australian Dollar Extends Slide to 11th Day; N.Z. Dollar Drops

By Ron Harui and Candice Zachariahs
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Aug. 12 (Bloomberg) -- Australia's dollar fell for an 11th day, the longest losing streak since 1975, after commodity prices slumped and the yield premium on the nation's two-year bonds over Treasuries narrowed. New Zealand's dollar dropped.

The Australian dollar, known as the Aussie, has lost 10 percent since reaching a 25-year high on July 16 as traders started to bet that the central bank will cut interest rates to support a slowing economy. The Reserve Bank of Australia said yesterday that a ``significant moderation'' in domestic demand would give it room to lower borrowing costs.

``This reflects a very big change in expectations in domestic money markets from the RBA,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. With yield differentials narrowing ``and commodity prices moving lower that removes a relative support for the Aussie.''

Australia's currency slipped to the lowest in more than six months and New Zealand's dollar declined to the weakest since September as prices dropped for commodities the nations export on speculation a cooling global economy will damp demand.

Australia's dollar declined as much as 1.6 percent to 87.58 U.S. cents, the lowest since Jan. 25. It traded at 87.62 as of 2:50 p.m. in Sydney from 89.02 cents late in Asia yesterday. The currency fell 1.2 percent to 96.60 yen from 97.72 yen.

The New Zealand dollar dropped 1 percent to 69.69 cents from 70.39 cents in Asia yesterday. It reached 69.50, the lowest since Sept. 11. The currency weakened 0.6 percent to 76.81 yen from 77.27 yen.

Whitlam Crisis

Australia & New Zealand Banking Group forecast in May that the currency, which was allowed to trade freely in 1983, would reach parity with the U.S. dollar in 2008 following a two-year rally.

Traders are certain the RBA will lower its 7.25 percent benchmark rate by at least a quarter-percentage point when it meets next on Sept. 2, according to a Credit Suisse Group index based on interest-rate swaps. The odds for an increase in the next 12 months have turned around since the start of July.

Australia's 21st prime minister Gough Whitlam was dismissed in 1975 by Governor-General Sir John Kerr amid a constitutional crisis as opposition coalition members in the senate refused to approve bills for the annual budget. The event was described as the ``greatest political and constitutional'' crisis in Australia's history, according to the Wikipedia Web site.

Falling Commodities

The RBA said yesterday that ``economic growth will be fairly slow in the period ahead,'' in its quarterly policy statement. Gross domestic product will probably expand 2 percent this year compared with 4.3 percent in 2007 and less than the 2.25 percent forecast by the bank in May, the RBA said.

The Aussie was the second-worst performer among the 16 most- traded currencies versus the U.S. dollar in Asian trading today as the difference in yield between two-year Australian and U.S. government bonds narrowed to 3.35 percentage points, the lowest since Nov. 14. The differential reached a high of 5.10 points on Feb. 29.

The Australian dollar also dropped as gold, the nation's third most-valuable raw material export, tumbled to its lowest price since December. Oil, the fourth most-valuable, fell to a 14-week low and copper slipped to its lowest in six months.

Commodity prices influence the Australian and New Zealand dollars because raw materials account for 60 percent of Australia's exports, while sales of commodities including lumber make up 70 percent of New Zealand's overseas shipments.

Vulnerable Currencies

The New Zealand dollar, or kiwi, slid to an 11-month low as falling commodity prices may diminish the outlook for economic growth in the South Pacific nation, prompting traders to add to bets on further central bank rate reductions.

``Both the kiwi and the Aussie are probably most vulnerable, especially against the correlation that they exhibit against the commodity side,'' said Mike Moran, a senior currency strategist at Standard Chartered Bank in New York. ``Those are probably going to see the more pronounced retracement.''

The UBS Bloomberg Constant Maturity Commodity Index of 26 commodities declined 0.3 percent to 1,416.804 yesterday, the lowest since March 20. New Zealand's Treasury Department said Aug. 4 that the economy probably contracted in the second quarter, pushing the country into its first recession in a decade.

The Aussie and kiwi had correlations of 0.81 and 0.87, respectively, with the UBS Bloomberg Constant Maturity Commodity Index in the past month, according to data compiled by Bloomberg. A reading of 1 would mean they move in lockstep.

New Zealand Rates

The Reserve Bank of New Zealand lowered its official cash rate by a quarter-percentage point to 8 percent on July 24. Traders are betting that the RBNZ will cut its benchmark rate by 1.49 percentage points over the next 12 months, up from 1.47 percentage points yesterday, according to Credit Suisse Group indexes.

Australian 10-year government bonds advanced for a fourth day, pushing the yield down 4 basis points, or 0.04 percentage point, to 5.87 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.277, or A$2.77 per A$1,000 face amount, to 95.097.

New Zealand three-year government debt declined. The yield on the note rose 2 basis points to 6.23 percent. Yields move inversely to prices.

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