Australia, New Zealand Dollars Pare Gains as Stock Futures Fall

By Candice Zachariahs

Oct. 29 (Bloomberg) -- The Australian and New Zealand dollars pared gains after U.S. stock futures fell, damping investor appetite for higher-yielding assets.

The currencies earlier advanced the most in more that two decades against the yen after reports the Bank of Japan may cut interest rates. The South Pacific nations' assets have been favorites with investors seeking higher returns using low-cost funds such as loans in Japan.

``Everything is 100 percent correlated these days to risk aversion and the Aussie is an expression of risk trades,'' said Ashley Davies, a currency strategist in Singapore at UBS AG, the world's second-largest foreign exchange trader. ``A deleveraging environment tends to weigh against currencies like the Australian dollar. I would probably be looking at this as an opportunity to resell the currency.''

Australia's dollar, nicknamed the Aussie, rose 4.9 percent to 61.36 yen at 4:35 p.m. in Sydney from 58.47 yen late in Asia yesterday. The currency earlier gained as much as 10.8 percent against the yen, the most since it started freely trading in 1983. The local dollar gained 3 percent to 63.69 U.S. cents from 61.87 cents yesterday.

New Zealand's currency jumped the most since 1985 against the dollar and yen before trading at 54.94 yen from 51.80 late in Asia yesterday. It bought 57 U.S. cents from 54.81 cents.

U.S. Stocks

The currencies retreated after U.S. index futures weakened, pointing to a drop when markets open later today. The Dow Jones Industrial Average yesterday posted its second-best point gain as the cheapest valuations in 23 years lured investors back to equities yesterday.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, fell to the lowest in a week yesterday.

Australia and New Zealand's currencies advanced against the dollar after the UBS Bloomberg Constant Maturity Commodity index of 26 raw materials rose for a second day yesterday. 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.

The Australian dollar may come under renewed pressure on Oct. 31 as fund managers adjust their currency hedges for declines in equity markets, said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney.

``Liquidity is still very thin, so the moves could be quite large,'' he said.

Dollar Swap Line

New Zealand's dollar advanced as the Federal Reserve authorized a $15 billion swap line with New Zealand's central bank to provide U.S. dollars, the 10th such currency-exchange program aimed at easing the worldwide credit freeze.

Benchmark interest rates are 6 percent in Australia and 6.5 percent in New Zealand, compared with 0.5 percent in Japan and 1.5 percent in the U.S., attracting investors to the South Pacific nations' assets. The risk in such trades is that currency market moves will erase profits.

Australian government bonds advanced. The yield on the 10- year note fell 7 basis points, or 0.07 percentage point, to 5.208 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 rose 0.583, or A$5.83 per A$1,000 face amount, to 100.326.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.355 percent from 6.335 yesterday.

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