Australian, N.Z. Dollars Weaken as Commodity Prices Decline

By Ron Harui

Aug. 25 (Bloomberg) -- The Australian and New Zealand dollars weakened for a second day on speculation a decline in commodity prices will diminish the outlook for the South Pacific economies.

Australia's currency fell to near a seven-month low and New Zealand's slid to its lowest in a week on prospects reduced earnings from exports will strengthen the case for the countries central banks to cut interest rates. Both currencies declined as traders added to bets for lower borrowing costs and the U.S. dollar advanced after the price of oil dropped.

``A strong U.S. dollar and weaker commodities are a powerful combination against the Australian dollar,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``Any rally will be sold ahead of the Reserve Bank of Australia meeting next week.''

The Australian dollar dropped 0.3 percent to 86.41 U.S. cents as of 4:40 p.m. in Sydney, from 86.65 cents late in New York on Aug. 22. It reached 86.15 cents, near the 85.93 level touched on Aug. 13, the lowest since Jan. 23. It will trade between 86 and 88 cents this week, Morriss forecast.

The currency, known as the Aussie, weakened 0.3 percent to 95.10 yen from 95.38 yen.

The New Zealand dollar slid 0.3 percent to 70.63 U.S. cents from 70.87 cents late in New York on Aug. 22. It touched 70.39 cents, the lowest since Aug. 18. The currency, called the kiwi, slipped 0.5 percent to 77.67 yen from 78.04 yen. The kiwi fell 0.2 percent versus the Aussie to NZ$1.2243 from NZ$1.2224.

Raw Materials

Australia's dollar extended this month's loss to 8.4 percent, the largest among the 16 most-traded currencies versus the U.S. dollar, after the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials slid the most in two weeks.

Gold, Australia's third-most valuable commodity export, fell 1.7 percent on Aug. 22. Raw materials account for 60 percent of Australia's exports and sales of commodities including lumber make up 70 percent of New Zealand's overseas shipments.

Investors are certain the Reserve Bank of Australia will cut its 7.25 percent benchmark interest rate by at least 25 basis points, or 0.25 percentage point, at its next meeting on Sept. 2, according to a Credit Suisse Group index based on interest-rate swaps.

Any losses in Australia's dollar may be limited after the nation's government yesterday gave approval to Aluminum Corp. of China, or Chinalco, to raise to 11 percent its stake in Rio Tinto Group, listed in both Sydney and London.

``The government is allowing foreign investment into the resource sector,'' said Lee Wai Tuck, a currency strategist in Singapore at Forecast Pte. ``It's a bit supportive for the Aussie in that there will still be demand for Australian resource firms.''

Chinalco's Investment

Chinalco, in partnership with Alcoa Inc., bought a 9 percent stake in Rio in February and said in March it may seek to increase that holding.

``I have decided to raise no objections under Australia's foreign investment policy,'' Wayne Swan, Federal Treasurer of Australia, said yesterday.

The kiwi weakened for a second day against the Aussie on speculation New Zealand's economic growth will slow at a faster pace than Australia's.

``We believe the Aussie-kiwi should be higher because the fundamentals of the Australian economy are much stronger than those of the New Zealand economy,'' Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, wrote in a research note today.

Statistics New Zealand may say tomorrow the trade deficit widened to NZ$538 million ($380 million) in July, from a NZ$223 million trade shortfall in June, according to a Bloomberg News survey of economists. The report may add to signs the country's economy is cooling.

Government Bonds

Traders are betting the Reserve Bank of New Zealand will lower its 8 percent official cash rate by 1.45 percentage points over the next 12 months, according to a separate Credit Suisse Group index.

Australian government bonds were little changed, with the 10-year note at 5.80 percent, according to data compiled by Bloomberg. The 10-year yield of New Zealand's government debt held at 6.09 percent.

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