Australian, New Zealand Dollars Are Poised for Monthly Decline

By Chris Young and Tracy Withers
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Aug. 29 (Bloomberg) -- The Australian dollar fell, headed for the biggest monthly loss in 22 years, on speculation the nation's interest-rate advantage over the U.S. will narrow. New Zealand's dollar headed for a third monthly loss.

The currencies weakened after a U.S. government report showed yesterday the economy grew faster than economists expected in the second quarter. Australia's dollar is the worst performer of the 16 most-traded currencies in August as traders bet the central bank will lower interest rates next week for the first time in seven years and the yield premium of the nation's bonds shrank.

``It was only two months ago that people were expecting higher rates in Australia so there's been a dramatic shift in expectations weighing on the Australian dollar,'' said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Sydney. ``U.S. data has surprised to the upside.''

The Australian dollar declined to 86.32 U.S. cents as of 10:07 a.m. in Sydney, compared with 86.65 cents in late Asian trading yesterday and 94.23 cents at the end of July for an 8.4 percent monthly decline, the most since July 1986.

New Zealand's currency bought 70.30 U.S. cents from 70.49 cents late yesterday and 73.43 at the end of July.

Australia's dollar has tumbled 12 percent since reaching a 25-year high of 98.49 cents on July 16. Policy makers said they may cut rates soon to avoid a ``deeper and more persistent'' economic slowdown, according to minutes of this month's rate meeting released Aug. 19. The currency has also weakened as the prices of commodities the country exports slumped on concern global growth is slowing.

Interest Rates

Australia's benchmark borrowing cost is 7.25 percent, New Zealand's 8 percent while the U.S. Federal Reserve's target is 2 percent. Traders expect the Reserve Bank of Australia to cut rates by a quarter-percentage point on Sept. 2 and lower the benchmark to at least 6.25 percent in the next year, according to Credit Suisse Group indexes based on interest-rate swaps.

New Zealand's dollar headed for its longest monthly losing streak in three years after the U.S. Commerce Department reported a 3.3 percent annualized increase in gross domestic product from April through June that was higher than previously estimated.

Investors bought U.S. assets after Nationwide Building Society said house prices in Britain fell this month at the fastest annual pace in almost 20 years, and Bank of England policy maker David Blanchflower said U.K. interest rates need to decline to help the economy out of a recession.

Dollar Rebound

``A rebound in the U.S. dollar amid a mix of strong GDP and dovish comments from the Bank of England, knocked the New Zealand dollar back,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.

Australian 10-year government bonds declined today, pushing the yield up 1 basis point to 5.77 percent. The price of the 5.25 percent bond maturing in March 2019 fell 0.046, or A$0.46 per A$1,000 face amount, to 95.936. The yield was 6.22 percent at the end of last month.

New Zealand's benchmark 10-year bond yield was unchanged from yesterday at 6.01 percent. It has fallen 12 basis points this month. A basis point is 0.01 percentage point.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net.