Australia, New Zealand Dollars Set for Worst Month Since 1980s

By Candice Zachariahs

Oct. 31 (Bloomberg) -- The Australian and New Zealand dollars are set for the biggest monthly declines since the mid- 1980s after concern the global economy will slip into recession prompted investors to dump the nations' higher-yielding assets.

The currencies have plunged against the U.S. dollar and yen this month as interest-rate cuts in the U.S., Europe and Asia failed to halt a global stocks sell-off that wiped out more than $10 trillion of market value. The South Pacific nations' dollars weakened as prices of commodities, which account for more than half of their exports, tumbled.

``Even though we have seen central banks around the world cut interest rates that's not going to be enough to prevent a global recession,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``We will continue to see risk aversion and repatriation-type flows support the yen and the U.S. dollar. The trend for both the Aussie and Kiwi will be lower in coming months.''

The Australian dollar dropped 17 percent this month to 66.68 U.S. cents as of 1 p.m. in Sydney, from 79.25 at the end of last month. It also plunged 23 percent to 65.49 yen. The declines were the most since the Aussie was traded freely in December 1983.

New Zealand's dollar slumped 13 percent to 58.57 U.S. cents, the biggest drop since 1984. It also tumbled 19 percent to 57.52 yen.

The currencies declined for the first time in four days today after a report showed that the U.S. economy contracted in the third quarter by the most since 2001, adding to the risk f a global recession . Federal Reserve Bank of San Francisco President Janet Yellen said yesterday that recent data was ``deeply worrisome.''

Cheaper Commodities

Concern about the economic slump helped drag commodities prices lower, weighing on the Australian and New Zealand dollars. The Reuters/Jefferies CRB Index of 19 raw materials has plunged 23 percent since Sept. 30, poised for the biggest monthly drop since it was introduced in 1956.

Raw materials account for 60 percent of Australia's exports, while sales of commodities make up 70 percent of New Zealand's overseas shipments.

``We are bearish on the outlook for the global economy, with our economists looking for the harshest global slowdown since the early 1980s,'' wrote a team of strategists led by Sydney-based John Horner at Deutsche Bank AG, in a research note dated Oct. 30. ``This keeps us bearish on dollar-bloc currencies, especially the Australian and Canadian dollars.''

Hedging

The Aussie may come under pressure today as domestic investment funds, the world's fourth-biggest money managers, may have to dump their own currency as they adjust foreign-exchange hedges at the end of the month, said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney.

Australian government bonds fell. The yield on the 10-year note rose 1 basis points, or 0.01 percentage point, to 5.238 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 declined 0.075, or A$0.75 per A$1,000 face amount, to 100.088.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.355 percent today from 6.340 yesterday.

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