Australian, N.Z. Dollars Rise on U.S. Rescue of Fannie, Freddie

By Ron Harui

Sept. 8 (Bloomberg) -- The Australian and New Zealand dollars rose against the yen after the U.S. government seized control of Fannie Mae and Freddie Mac, restoring confidence among investors about buying higher-yielding assets.

The currencies climbed the most since March on speculation the takeover of the two largest U.S. mortgage financiers will curb credit-market losses, encouraging so-called carry trades. The Australian and New Zealand dollars were the second- and third-best performers among the 16 most-active currencies versus the U.S. dollar on signs the world's largest economy is cooling.

``There's a risk angle here as the yen crosses have unwound a lot of risk aversion, which has lent a great deal of support to both the Aussie and the kiwi,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney, referring to the currencies by their nicknames. ``There's an understanding there are more challenging economic conditions ahead for the U.S. as they work through this mess.''

The Australian dollar rose 2.8 percent to 90.33 yen at 5:07 p.m. in Sydney from 87.91 yen late in New York on Sept. 5, when it reached 85.02 yen, the lowest since July 2006. The currency gained 1.8 percent to 83.09 U.S. cents.

The New Zealand dollar climbed 2.9 percent to 74.15 yen from 72.04 yen late in New York on Sept. 5, when it touched 69.96 yen, the weakest since July 2006. The currency strengthened 2.1 percent to 68.24 U.S. cents.

Volatility Declines

The U.S. government took over Fannie Mae and Freddie Mac yesterday after the largest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

Volatility implied by one-month Aussie-yen options fell to 18.13 percent from 19.05 percent in New York on Sept. 5, when it reached 19.91 percent, the highest since April 3. Lower volatility may encourage carry trades as it suggests a smaller risk of exchange-rate fluctuations.

``The decision should help to ease risk aversion, and hence, currencies such as the Australian dollar should stabilize and implied foreign-exchange volatility should fall,'' said Ashley Davies, a currency strategist at UBS AG in Singapore, confirming a research note published today.

Payrolls in the U.S. fell by 84,000 in August, more than economists expected, while losses for the prior two months were revised higher, the Labor Department said Sept. 5.

Benchmark interest rates of 7 percent in Australia and 8 percent in New Zealand compare with 0.5 percent in Japan, making the currencies favorites for carry trades. In a carry trade, 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 currency market moves erase those profits.

Australian Dollar Forecasts

Australia's dollar may weaken on expectations the global economy will slow, undermining demand for the nation's commodities, according to ABN Amro Holding NV and Commonwealth Bank of Australia.

``Slower global growth is reducing the demand for commodities,'' Richard Grace, chief currency strategist at Commonwealth Bank, wrote in a research note today. ``Because close to 60 percent of Australia's exports are commodities, market participants will push the Australian dollar lower.''

ABN Amro forecasts the Aussie will decline to 78 U.S. cents by the end of September, versus an earlier prediction of 83 cents. Commonwealth Bank expects the currency to fall to 78 cents by year-end, compared with a prior estimate of 92 cents.

``We are in the midst of a more unsettling time for global currency markets and commodities,'' Greg Gibbs, a currency strategist at ABN Amro in Sydney, wrote in a client note on Sept. 5. ``This suggests that the Aussie will struggle near term to find its feet.''

`Gradual Fall'

The Reserve Bank of Australia seeks a ``gradual fall'' in the inflation rate and will cut borrowing costs again when there's room to move, Governor Glenn Stevens told parliament's economics committee in Melbourne today.

The advance in New Zealand's dollar may be curbed by speculation Reserve Bank of New Zealand Governor Alan Bollard will reduce borrowing costs at his next review on Sept. 11 as the economy slows. A Credit Suisse Group index based on interest-rate swaps showed traders are certain the RBNZ will cut rates at the meeting.

New Zealand's Treasury Department said today that it can't rule out a contraction in the third quarter and maintained its view the economy shrank in the three months through June. Gross domestic product contracted 0.3 percent in the first quarter.

Australian government bonds fell. The yield on the 10-year note rose 15 basis points, or 0.15 percentage point, to 5.77 percent. The price of the 5.25 percent security maturing in March 2019 decreased 1.157, or A$11.57 per A$1,000 face amount, to 95.902. Yields move inversely to prices.

New Zealand government debt declined. The yield on the 10- year benchmark bond advanced 9 basis points to 6 percent. The price of the 6 percent security due in December 2017 dropped 0.599, or NZ$5.99 per NZ$1,000 face amount, to 100.008.

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