Australia, N.Z. Dollars Headed for Weekly Drops Against Yen

By Candice Zachariahs

Sept. 26 (Bloomberg) -- The Australian and New Zealand dollars were set for weekly declines against the yen as delays to a U.S. $700 billion banks rescue plan curbed demand for higher-yielding overseas assets funded out of Japan.

The Australian dollar rose against the greenback this week and New Zealand's currency retreated as U.S. lawmakers debated a Treasury proposal to use taxpayers' funds to buy soured assets from financial companies. Australia's currency surged 3.7 percent against the dollar on Sept. 19 on reports that the U.S. government would take action to ease a financial crisis that forced Lehman Brothers Holdings Inc. to file for bankruptcy.

``We bounced sharply last week as the market anticipated some positive news out of the U.S. bailout proposals,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. ``We haven't had a clear-cut proposal out of the U.S. yet. It's an ongoing debate and so we haven't really had the conditions to drive it on.''

The Australian dollar rose 0.1 percent to 88.61 yen at 12:08 p.m. in Sydney from 88.53 in late Asian trading yesterday, paring its decline from 89.60 in New York late on Sept. 19. It traded at 83.67 U.S. cents from 83.57 cents in Asia yesterday and 83.40 in New York last week.

New Zealand's dollar rose 0.4 percent to 72.79 yen from 72.51 yen late in Asia yesterday and 74.04 in New York on Sept. 19. It bought 68.71 U.S. cents from 68.46 yesterday and 68.90 last week in New York.

The currencies fell against the yen this week as the VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose to 35.72 on Sept. 23, close to its highest since October 2002.

Carry Trades

Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., luring investors to the South Pacific nations' assets. The currencies are favorites with investors using carry trades to seek higher returns using funds from a country with low borrowing costs. The risk is that exchange-rate fluctuations erase profits.

New Zealand's currency rose against the dollar and yen today after a government report showed that the economy contracted less than economists forecast in the second quarter.

Gross domestic product fell 0.2 percent from the first quarter, when it declined 0.3 percent, signaling the nation's first recession in a decade. The median expectation in a Bloomberg News survey of 13 economists was for a 0.5 percent contraction.

Volatile Markets

The Australian and New Zealand dollars have been volatile this week as U.S. lawmakers debated plans to buy assets from financial institutions at above-market prices to spur lending.

``You've had risk aversion swing around from optimism to pessimism based on the rescue package whether it'll go through or not,'' said Besa Deda, acting chief economist and strategist at St. George Bank Ltd. in Sydney. ``Financial markets are still reasonably illiquid and that's exacerbating the volatility.''

The Australian currency may bounce to 85 cents on the passage of the rescue deal, said Gibbs, who recommends selling the currency if it rallies.

Australian government bonds rose. The yield on the 10-year note fell 3 basis points, or 0.03 percentage point, to 5.693 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 rose 0.221, or A$2.21 per A$1,000 face amount, to 96.542.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, fell to 6.990 percent today from 6.995 yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net