Australia, New Zealand Dollars Post Biggest Drops in 25 Years

By Candice Zachariahs

Oct. 10 (Bloomberg) -- Australia's currency plunged this week by the most since it began trading freely in December 1983 as stocks slumped worldwide, prompting investors to cut holdings of higher-yielding assets funded with loans in Japan.

The Australian dollar declined 20 percent against the yen and New Zealand's dollar lost 16 percent as global equities erased more than $8 trillion in market worth this month. Australia's central bank lowered interest rates by 1 percentage point, the most since 1992, setting off a round of cuts by other central banks that failed to thaw frozen credit markets.

``Cutting interest rates doesn't necessarily change the underlying problem in the credit markets,'' said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong. ``Panic, significant nervousness and fear'' is spreading among investors in the equity markets.

The Australian dollar fell to 65.41 yen as of 5:02 p.m. in Sydney from 81.48 yen a week ago in New York. It traded at 66.26 U.S. cents from 77.40 on Oct. 3, a loss of 14 percent for the week. The New Zealand currency declined to 58.74 yen from 69.76 on Oct. 3 and dropped 10.3 percent this week against the U.S. dollar to 59.38 cents.

The Reserve Bank of Australia reduced borrowing costs to 6 percent on Oct. 7 to spur lending. The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank all followed. Switzerland, Taiwan, China and South Korea also cut their benchmark rates.

Selvanathan said the Australian dollar may fall below 60 U.S. cents in the medium term and recommends selling the currency if it rallies.

Money Market Rates

The coordinated rate cuts and central bank fund injections to alleviate the global credit crisis failed to bring interbank money market rates down.

Australia pumped A$2.63 billion ($1.8 billion) into the system today after the cost of borrowing in dollars for three months in London soared to the highest this year.

The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate gained to 108 basis points in Sydney, from 89 yesterday.

``Rate cuts at this stage, particularly from the ECB and the Bank of England, were too little too late,'' said Sally Auld, interest-rate strategist at JP Morgan Securities Australia Ltd. ``What markets are telling you is that it doesn't actually matter what central banks and governments do.''

The Australian and New Zealand dollars also dropped as crude oil, Australia's fourth-most valuable raw material export, fell to an 11-month low on concern fuel demand will cool.

Commodities Decline

Futures touched $82.07 a barrel, the lowest intraday price since October 2007. Raw materials account for 60 percent of Australia's exports, and 70 percent of New Zealand's.

``Slowing global growth will continue to put downside pressure on currencies that display a strong link to cyclical forces, such as the Australian dollar,'' wrote Goldman Sachs Group Inc. currency strategists led by London-based Thomas Stolper in a research note dated yesterday.

The MSCI Asia Pacific Index of regional shares headed for a weekly drop of 18 percent, the biggest slump since the index was created in 1987, reducing demand for higher-yielding assets.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose above 60 to a record yesterday.

Further to Fall?

``I don't necessarily think the aussie's decline is over yet,'' said Craig Ferguson, currency hedge fund manager at Antipodean Capital Management in Melbourne, during an interview on Bloomberg TV. ``I think you'll see the RBA, between 48 and say 55 cents, put a floor in the currency, which one of the reason you don't want to be short anything under 60 cents.''

The currencies are favorites of so-called carry trades, where investors seek higher returns on investments funded in countries with lower borrowing costs. The risk in such trades is that exchange-rate fluctuations erase profits.

Benchmark interest rates are 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 1.5 percent in the U.S.

Australian government bonds fell. The yield on the 10-year note rose 5 basis points, or 0.05 percentage point, to 5.139 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 rose 0.403, or A$4.03 per A$1,000 face amount, to 100.884.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, fell to 6.416 percent today from 6.490 yesterday.

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