Australia, New Zealand Dollars Slump This Week as Stocks Tumble

By Candice Zachariahs and Ron Harui

Oct. 24 (Bloomberg) -- The Australian and New Zealand dollars fell this week to the lowest levels against the yen in at least six years as investors sold higher-yielding assets.

The currencies headed for their third weekly drop this month as Asian stocks slid on signs the world economy is on the brink of a recession. Investors bought back yen they borrowed in so-called carry trades used to purchase assets offering higher returns in Australia and New Zealand. The two nations' dollars also fell versus the U.S. currency as the price of commodities the countries export plunged on concern demand will falter.

``What you have is the global economy going down, commodity prices coming off and the old theme of global de-leveraging,'' said Thomas Harr, a senior currency strategist at Standard Chartered Plc in Singapore. ``All of these issues are negative for the Aussie and the kiwi and positive for the yen.''

Australia's dollar dropped 13.7 percent this week to 60.42 yen as of 6:03 p.m. in Sydney from 70 yen on Oct. 17 in New York. It reached 60.17 today, the lowest since October 2001.

New Zealand's currency declined 11.8 percent for the week to 54.89 yen and touched 54.56, the weakest since September 2002.

The Australian dollar fell 7.3 percent to 63.84 U.S. cents from 68.88 cents in New York on Oct. 17. New Zealand's dollar dropped to 57.52 cents, losing 5.7 percent for the week. It touched 57.41, the lowest since September 2003.

Risk Aversion

``The Aussie is always seen as a proxy for risk aversion and emerging currencies in these times,'' said Gregg Gibbs, a currency strategist at ABN Amro Australia Ltd. in Sydney. ``It's a liquid currency that offers scope to get in and get trades done when people are fearing the worst.''

Australia's dollar has dropped 31 percent against the yen and 23 percent versus the U.S. dollar in the past month, the second-biggest losses of the 16 major currencies, as increasing signs of a global recession hammered stock and commodity prices.

The Australian dollar still ``targets'' the 2000 low of 55.52 yen based on charts that predict price movements, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London. Daily momentum indicators such as the stochastic oscillator chart have ``turned lower again,'' Edgeley wrote in a research note yesterday.

New Zealand's dollar has fallen 24 percent versus the yen and 16 percent against the U.S. currency over the past month.

Australia's S&P/ASX 200 Index of shares has declined 39 percent this year, joining a rout in global equities. Asian stocks tumbled after South Korea's economic growth weakened, deepening concern a global slowdown is hurting profits.

Commodities

The UBS Bloomberg Constant Maturity Commodity index of 26 raw materials dropped for a third day yesterday and is down 24 percent for the year. Raw materials account for 60 percent of Australia's exports and 70 percent of New Zealand's.

The VIX volatility index, a gauge reflecting expectations for stock-market price changes and risk appetite, was at 67.80 compared with a record high closing price of 70.33 on Oct. 17.

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., making the South Pacific nations' assets favorites for 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 two. The risk is that currency moves erase those profits.

New Zealand's dollar also declined this week as the central bank cut its benchmark interest rate by a record 1 percentage point to boost an economy that is already in recession.

`Below-Trend Growth'

Traders are betting the Reserve Bank of New Zealand will reduce rates by a further 1.17 percentage points over the next 12 months, according to a Credit Suisse index based on overnight swaps trading.

The pace of cuts is ``gathering steam,'' Ned Rumpeltin, a London-based currency strategist at Morgan Stanley, wrote in a research note yesterday. ``We expect the New Zealand dollar to remain weak in the months ahead as foreign-exchange markets remain volatile, risk appetite is fragile, and the economic slowdown becomes increasingly global.''

The Reserve Bank of Australia will lower rates by 1.60 percentage points over the next year, according to a separate Credit Suisse index.

``We are now forecasting below-trend growth through to 2010,'' Tony Morriss, a senior currency strategist at ANZ Banking Group Ltd. in Sydney, wrote in a research note Oct. 21. ``We now expect the Reserve Bank to cut rates further over coming months, toward a cash rate of 4.5 percent.''

Australian government bonds rose for a fifth day. The yield on the benchmark 10-year note fell 17 basis points to 4.91 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 climbed 1.372, or A$13.72 per A$1,000 face amount, to 102.711. A basis point equals 0.01 percentage point.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.356 percent from 6.2850 percent a week ago.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net