Australia, N.Z Dollars Gain as China, U.S. Cut Interest Rates

By Candice Zachariahs

Oct. 30 (Bloomberg) -- The Australian dollar advanced the most in a week against the greenback and New Zealand's dollar also rose after central banks in the U.S. and China cut interest rates, boosting investor appetite for higher-yielding assets.

The currencies rose versus the U.S. dollar as the Federal Reserve lowered its benchmark rate 0.5 percentage point to 1 percent and China, the world's largest consumer of industrial metals, also lowered rates. They also gained against the yen as prices surged for commodities the two nations export.

``The Aussie and Kiwi have recovered substantially in the last 24 hours,'' said Mike Symonds, head of currency trading at Bank of New Zealand Ltd. in Wellington. ``The Fed's cut 50 basis points and prior to that we've had other central bank cuts.''

The Australian dollar rose for the third day, advancing 3.3 percent to 67.14 U.S. cents at 10:20 a.m. in Sydney from 64.98 cents late in Asia yesterday. It touched 67.98 cents, the highest since Oct. 22. The currency advanced 3.7 percent to 65.36 yen from 63.06 yen yesterday.

New Zealand's dollar gained 0.9 percent to 58.26 U.S. cents from 57.75 in Asia yesterday. It bought 56.71 yen from 56.03.

The Australian currency rose after China, the nation's biggest trading partner, late yesterday reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent, its third cut in two months. The People's Bank of China said in a statement that the deposit rate will drop to 3.60 percent from 3.87 percent.

The Federal Reserve cut its benchmark rate to match a half- century low, seeking to avert the worst U.S. economic downturn in the postwar era.

Recent Declines

Australia's currency also gained as Ric Battellino, Deputy Governor of the Reserve Bank of Australia, said the nation's economy is set to avoid a recession and an ``inflation overhang'' may limit the central bank's scope to trim borrowing costs.

The RBA has ``a big task ahead to bring inflation down and this could limit room for maneuvering on monetary policy,'' Battellino said in Sydney today. Governor Glenn Stevens cut borrowing costs this month by 1 percentage point, the biggest reduction since a recession in 1992.

Traders today pared bets the RBA will lower borrowing costs by 0.75 percentage point when it meets Nov. 4, according to a Credit Suisse index based on overnight swaps trading. The chance of a 0.75 percentage point cut fell to 14 percent today from 82 percent yesterday, according to the gauge.

The Australian and New Zealand dollars began to rally Oct. 28 after the RBA bought its own currency for a third day. The Aussie, as it's nicknamed, dropped on Oct. 28 to as low as 60.10 U.S. cents, the weakest since April 2003.

RBA Interventions

``The bank has in recent times been intervening,'' said Battellino. ``The markets had become thin and illiquid. We felt that wasn't a good thing.''

The Australian and New Zealand currencies have plunged 15.4 percent and 13.1 percent, respectively, versus the U.S. dollar in the past month. The collapse of Lehman Brothers Holdings Inc. on Sept. 15 led to a freeze in lending that spurred investors to dump equities on concerns about a global recession. Australia's currency dropped 22.3 percent against the yen in the past month and New Zealand's retreated 20.1 percent.

``Lots will depend on whether we see continued improvement in credit and equity markets and an improvement in risk appetite,'' Symonds said. ``The global economic environment still looks negative and on that basis you'd expect that at some point this recovery will falter.''

Commodities

The Reuters/Jefferies CRB Index of 19 raw materials and the UBS Bloomberg Constant Maturity Commodity index of 26 raw materials gained for a third day as investors speculated that demand for commodities would increase. Raw materials account for 60 percent of Australia's exports, and 70 percent of New Zealand's.

Benchmark interest rates are 6 percent in Australia and 6.5 percent in New Zealand, compared with 0.5 percent in Japan and 1 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 2 basis points, or 0.02 percentage point, to 5.185 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 rose 0.133, or A$1.3 per A$1,000 face amount, to 100.509.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, was unchanged at 6.355 percent today.

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