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

By Ron Harui

Sept. 3 (Bloomberg) -- The Australian and New Zealand dollars fell to their lowest in a year on speculation declines in commodity prices will slow the economies of the two nations.

The Australian dollar also weakened and the nation's bonds advanced after a government report showed the economy grew at the slowest pace in more than three years, backing up the central bank's decision to cut interest rates yesterday. The two currencies declined for a fourth day on concern reduced export earnings will spur policy makers to cut borrowing costs further.

The growth report ``will encourage the Reserve Bank of Australia to continue easing and it shows that they were right to cut yesterday,'' said Adam Carr, senior economist at ICAP Australia Ltd. in Sydney. ``For the Aussie dollar, it's been sold off fairly aggressively lately. The data flow, the fact that the RBA is cutting and some of the recent moves in commodity prices are all negative.''

The Australian dollar declined to 82.93 U.S. cents as of 4:56 p.m. in Sydney, from 83.37 cents late in Asia yesterday. It reached 82.39 cents, the lowest since Sept. 11, 2007. It may weaken to 80 cents by year-end, Carr said. The currency, known as the Aussie, declined to 90.25 yen from 90.70 yen. It touched 89.69 yen, the weakest since March 24.

The New Zealand dollar fell to 67.72 U.S. cents from 68.51 cents late in Asia yesterday. It reached 67.36 cents, the lowest since Aug. 17, 2007. The currency dropped to 73.71 yen from 74.53 yen yesterday. It touched 73.24 yen, the weakest since Aug. 11, 2006.

Commodities Fall

Australia's currency declined after the Bureau of Statistics said gross domestic product rose 0.3 percent in the second quarter from the first, when it increased a revised 0.7 percent. The median estimate of economists surveyed by Bloomberg News was for growth of 0.4 percent.

Australian Treasurer Wayne Swan said today the data supported the bank's decision to lower interest rates.

Gold, Australia's third most-valuable commodity export, headed for a fourth day of losses, falling 0.7 percent. New Zealand's commodity export price index posted its biggest decline in seven years in August led by aluminum and dairy products, ANZ National Bank Ltd. said today.

``Commodities appear to be in a downtrend, which means commodity-linked currencies such as the Australian and New Zealand dollars are likely to be sold,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank.

The commodity export price index dropped 3.3 percent in August from a record high in July, ANZ said in a report released in Wellington. Prices rose 3.6 percent from a year earlier.

Raw materials account for 60 percent of Australia's exports and sales of commodities such as lumber make up 70 percent of New Zealand's overseas shipments.

Rate Cut Bets

The Australian dollar has tumbled 14 percent this quarter against the U.S. dollar, the worst performer of the 16 most- traded currencies, as the RBA lowered interest rates for the first time in seven years, taking the benchmark to 7 percent.

New Zealand's dollar has dropped 11.5 percent since June 30 as the Reserve Bank of New Zealand reduced its key rate in July by a quarter-percentage point to 8 percent.

The odds that the RBA will cut borrowing costs by a quarter-percentage point at its Oct. 7 meeting were 66 percent, according to interest-rate contracts on the Sydney Futures Exchange. A Credit Suisse Group index based on interest-rate swaps showed traders are certain that RBNZ will cut rates at its Sept. 11 meeting.

UBS AG, the world's second-largest currency trader, lowered its one-month forecasts for the Australian and New Zealand dollars against the U.S. currency, according to a research note published yesterday.

Australia's dollar will trade at 85 cents and New Zealand's dollar will reach 68 cents in a month, compared with previous predictions of 89 cents and 70 cents, UBS said.

Government Bonds

Benchmark interest rates of 7 percent in Australia and 8 percent in New Zealand compare with 0.5 percent in Japan, making them favorite targets for so-called carry trades.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.

Australian two-year government notes rose for a fourth day, reversing losses after the release of the GDP report. The yield fell 3 basis points, or 0.03 percentage point, to 5.66 percent, the lowest since June 2006, according to data compiled by Bloomberg. The price of the 5.25 percent note due August 2010 rose 0.049, or A$0.49 per A$1,000 face amount, to 99.258.

New Zealand government bonds gained, pushing down the yield on the benchmark 10-year note by 2 basis points, or 0.02 percentage point, to 5.98 percent. The price of the 6 percent security maturing in December 2015 rose 0.106, or NZ$1.06 per NZ$1,000 face amount, to 100.154.

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