Australian, New Zealand Dollars Drop on Global Growth Concerns

By Candice Zachariahs
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Oct. 22 (Bloomberg) -- The Australian dollar pared loses after a report showed inflation accelerated in the third quarter, prompting speculation the central bank will cut interest rates less than previously expected. New Zealand's dollar also fell.

The currencies declined for a second day against the dollar and the yen as the Standard & Poor's 500 index slid after earnings reports from companies including Texas Instruments Inc. fell short of analyst estimates, fanning concern about a global slump. Traders were betting at the end of last week that the Reserve Bank of Australia would cut borrowing costs by 75 basis points, or 0.75 percentage points, at its Nov. 4 policy meeting.

The inflation report ``doesn't change the likelihood that the Reserve Bank will move to cut interest rates; it probably does temper it to a degree,'' said Peter Jolly, head of markets research at NabCapital in Sydney, the investment-banking unit of National Australia Bank Ltd. ``This outcome tells us, certainly no more than 50 basis points.''

The Australian dollar rose as high as 68.25 U.S. cents from 67.92 cents just before the report. It traded at 67.86 at 12:34 p.m. in Sydney, from 69.15 cents in late Asian trading yesterday. New Zealand's dollar declined 1 percent to 60.83 cents from 61.45 cents.

Australia's dollar was 2.8 percent lower at 68.03 yen, while New Zealand's fell 1.9 percent to 60.98 yen.

The currencies weakened today after stocks in the U.S. dropped. Texas Instruments, the second-largest U.S. semiconductor maker, slumped to a five-year low after the company announced fourth-quarter sales and earnings forecasts that missed analyst projections.

Global Slump

``The global economy is transitioning from the financial aspects of the crisis to the real economic consequences,'' said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. ``The global growth cycle is turning down very aggressively. The kiwi and Aussie dollars in that environment are going to remain very heavy,'' he said, referring to the currencies by their nicknames.

The VIX volatility index, a gauge reflecting expectations for stock-market price changes and risk appetite, rose to 53.11 yesterday. The VIX has averaged 26.34 this year, more than a third higher than in 2007, and rose to a record 70.33 on Oct. 17.

Benchmark interest rates are 6 percent in Australia and 7.5 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.

Faster Inflation

Australia's annual inflation accelerated to 5 percent in the third quarter, the fastest pace since 2001, driven by costs for housing and food, according to government figures released today. Economists surveyed by Bloomberg estimated the consumer price index increased 4.8 percent from a year earlier.

The Reserve Bank will lower borrowing costs by at least 50 basis points at its next policy meeting to 5.5 percent, according to a separate Bloomberg survey of economists. Traders were betting on Oct. 17 that the central bank would lower its benchmark rate by 75 basis points, according to a Credit Suisse index based on overnight swaps trading.

The Reserve Bank of New Zealand Governor Alan Bollard will probably cut interest rates by a record 1 percentage point tomorrow, according to a separate Credit Suisse index. Nine of 11 economists surveyed by Bloomberg News expect a cut to 6.5 percent, with two forecasting a reduction of 75 basis points.

The cut will be of ``secondary importance'' said Bagrie, as markets focus on ``wider global themes''.

Australian government bonds fell for the first day in three. The yield on the benchmark 10-year note rose 5 basis points to 5.193 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.426, or A$4.26 per A$1,000 face amount, to 100.447. 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 6.3550 percent today from 6.338 yesterday.

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