Australian, New Zealand Dollars Fall on Credit-Market Concerns

By Ron Harui and Tracy Withers
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Aug. 26 (Bloomberg) -- The Australian and New Zealand dollars declined for a second day against the yen as concerns credit-market turmoil will widen prompted investors to sell higher-yielding assets funded in the Japanese currency.

Australia's dollar slid toward a four-month low and New Zealand's currency fell to its lowest in more than a week versus the yen on speculation American International Group Inc. will post a loss, spurring investors to reduce so-called carry trades. The Australian dollar dropped to its lowest in seven months against the U.S. currency on prospects the nation's central bank will cut interest rates from a 12-year high next week.

``I'm concerned the Australian dollar can't bounce from here and we have more downside to come,'' said Paul Milton, chief foreign-exchange dealer at Societe Generale SA in Sydney. ``The fundamental picture is looking shaky for the Australian dollar and we're staring at rate cuts.''

The Australian dollar fell 1.7 percent to 93.75 yen as of 4:40 p.m. in Sydney, from 95.34 yen late in Asia yesterday. The currency, known as the Aussie, reached 93.57 yen. It touched 93.15 yen on Aug. 13, the weakest since April.

The Aussie dropped 1.6 percent to 85.49 U.S. cents from 86.85 cents. It reached 85.40 cents, the weakest since Jan. 22, and Milton predicts the currency will slide toward 83 cents in the next few weeks.

The New Zealand dollar lost 2.7 percent, the largest decline since May 8, to 75.72 yen from 77.80 yen late in Asia yesterday. It touched 75.71 yen, the lowest since Aug. 14. The currency, known as the kiwi, slid 2.5 percent, the most since June 5, to 69.10 U.S. cents.

Carry Trades

The Australian and New Zealand dollars are favorite targets of carry trades, in which investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency market moves erase those profits.

Benchmark interest rates are 7.25 percent in Australia and 8 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S.

Traders are certain Reserve Bank of Australia policy makers will lower their interest rate by a quarter-percentage point when they meet Sept. 2, according to interest-rate futures trading on the Sydney Futures Exchange.

Australia & New Zealand Banking Group Ltd. lowered its forecasts for the Australia dollar on prospects for a stronger U.S. dollar, weaker commodities and lower interest rates.

Commodities Decline

``When the dollar is going up and commodities are coming off, that's a double whammy against the Australian dollar,'' said Tony Morriss, a senior currency strategist in Sydney at Australia & New Zealand Banking Group, confirming a research note published today. ``We've also got the RBA going into easing mode.''

The Australian dollar is likely to trade at 92 cents at the end of September and 90 cents at year-end, according to ANZ's research note, compared with earlier predictions of 94 cents and 92 cents, respectively.

The New Zealand dollar was the worst performer among the 16 most-traded currencies versus the U.S. dollar and the yen today after AIG tumbled to a 13-year low in New York. Credit Suisse Group said the world's largest insurer may lose $2.41 billion this quarter on mortgage-related writedowns.

Sell N.Z. Dollar

Investors should sell the New Zealand dollar as the drop in global commodity prices slows the nation's economic growth, according to Standard Chartered Plc.

The New Zealand dollar is likely to fall to 69 cents by year-end, compared with a previous estimate of 71 cents, according to Standard Chartered. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has fallen almost 15 percent from a peak in July.

``The recent correction in global commodities is the straw that has broken the camel's back,'' New York-based currency strategist Mike Moran and Singapore-based Callum Henderson wrote in a research note yesterday. Fund managers should reduce their New Zealand dollar-denominated holdings to ``underweight'' from ``neutral,'' they wrote.

Australian government bonds gained. The yield on the benchmark 10-year bond fell 4 basis points, or 0.04 percentage point, to 5.75 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.328, or A$3.28 per A$1,000 face amount, to 96.061. Yields move inversely to prices.

New Zealand government debt advanced, pushing the yield on the benchmark 10-year note down by 3 basis points to 6.06 percent. The price of the 6 percent security due in December 2017 climbed 0.228, or NZ$2.28 per NZ$1,000 face amount, to 99.582.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net