Australian Dollar Heads for 2nd Weekly Decline on Rate Concerns

By Candice Zachariahs

Aug. 1 (Bloomberg) -- The Australian dollar headed for a second-straight weekly decline for the first time this year as traders speculated the Reserve Bank of Australia will cut borrowing costs to boost a slowing economy.

The currency fell in July for the first month since March after a government report showed retail sales dropped the most in six years and the National Australia Bank Ltd. and Australia and New Zealand Bank Ltd. boosted provisions for delinquent loans. RBA Governor Glenn Stevens said last month there is a ``good chance'' the economy will slow enough to curb rising prices.

``The signal from the RBA has been that the rate tightening cycle is over,'' said Sophia Drossos, a New York-based currency strategist at Morgan Stanley, the second-biggest U.S. securities firm. ``The flow of data in Australia reinforces the view that the economy has peaked and is slowing. The potential for rate cuts is what's weighing on the Aussie,'' she said referring to the currency by its nickname.

Australia's dollar fell 0.4 percent to 94 U.S. cents at 9:04 a.m. in Sydney, from 94.39 cents late in Asia yesterday and 95.62 cents in New York a week ago. It traded at 101.38 yen, down 0.8 percent from 102.15 late yesterday. The Australian dollar traded at 103.11 yen a week ago.

The Aussie lost 1.7 percent against the dollar in July.

The local currency fell for a fourth day after the Bureau of Statistics said yesterday retail sales declined 1 percent in June, after rising a revised 0.9 percent in May. Reserve Bank figures yesterday showed that lending to businesses and consumers rose at the slowest pace since 2002.

Borrowing Costs

A benchmark rate of 7.25 percent in Australia, compared with 0.5 percent in Japan and 2 percent in the U.S., has made Australia a favorite with investors looking to invest in higher- yielding assets.

Traders speculated yesterday the RBA will lower borrowing costs by 52 basis points, or 0.52 percentage point, over the next 12 months, according to a Credit Suisse Group index based on interest-rate swaps. The gauge showed July 25 that traders were betting on a 32 basis point reduction.

``The market's view of future interest rates is changing quite dramatically,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank. ``From expectations of tighter monetary policy now to expectations of a cut before year-end.''

A close below 93.36 cents, below would be strong bearish signal for the currency, he said.

ANZ, Australia's third-biggest bank by assets, on July 28 forecast its biggest full-year earnings drop since 1992 and tripled provisions for delinquent loans to about A$1.2 billion from a year earlier. National Australia, the country's biggest bank, last week disclosed A$830 million of provisions for credit market investments, prompting its worst share slump in 21 years.

To contact the reporter on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net