Australian, New Zealand Dollars Gain After South Korea Bank Aid

By Candice Zachariahs

Oct. 20 (Bloomberg) -- The Australian and New Zealand dollars rose after South Korea pledged as much as $130 billion to help banks and New Zealand said it may secure wholesale deposits, prompting investors to buy higher-yielding assets.

The currencies rose against the U.S. dollar after South Korea said yesterday it will guarantee $100 billion in bank debts and provide $30 billion in U.S. currency to financial institutions after Standard & Poor's said last week it may cut credit ratings for the nation's largest lenders. New Zealand's finance minister said today officials are working on a possible plan to guarantee wholesale deposits.

``The Koreans coming up with a rescue package of their own is helping to lower risk aversion,'' said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland. The Australian and New Zealand dollars will see ``a tentative rise as risk aversion eases.''

The Australian dollar gained 1.5 percent to 69.94 U.S. cents as of 4:39 p.m. in Sydney, from 68.88 cents late in New York on Oct. 17. New Zealand's dollar rose 0.4 percent to 61.44 cents from 61.21 cents in New York.

Australia's currency advanced 1.9 percent to 71.31 yen, from 70 yen in late New York trading Oct. 17. New Zealand's dollar traded at 62.67 yen, from 62.24 last week.

The South Pacific nations' currencies gained after South Korea yesterday joined Hong Kong, Australia and countries in Europe in providing state backing to banks amid a global financial crisis.

Bank Guarantees

New Zealand last week guaranteed retail deposits to bolster confidence in financial institutions. Unlike nations including Australia and South Korea, Finance Minister Michael Cullen's plan didn't include guarantees for wholesale deposits from global fund managers.

``The Reserve Bank and Treasury are working on a possible wholesale deposit guarantee scheme,'' Cullen said in a debate broadcast today on Radio New Zealand.

Traders are betting that the Reserve Bank of New Zealand will cut its benchmark rate 1 percentage point to 6.5 percent on Oct. 23, according to a Credit Suisse index based on overnight swaps trading, to boost the nation's economy which is in its first recession in a decade.

Any impact on the New Zealand dollar from the rate cut is likely to be limited, said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. ``Overall the trend remains to the downside and we continue favoring selling rallies.''

Australian Prime Minister Kevin Rudd last week announced A$10.4 billion in grants to pensioners, families and first home owners to protect the economy amid a worsening global financial crisis.

Producer Prices

Prices paid to Australian producers rose in the third quarter twice as fast as economists expected, which may stoke speculation central bank Governor Glenn Stevens won't repeat this month's decision to cut the benchmark interest rate by 1 percentage point. The producer price index advanced 2 percent after rising 1 percent in the second quarter, the Bureau of Statistics said in Sydney today.

Traders are betting that the Reserve Bank of Australia will lower rates by at least 50 basis points when it meets Nov. 4, with a 56 percent chance of a bigger cut, according to a separate Credit Suisse index. The market expected a 75 basis point cut on Oct. 17, the index showed.

``The prospects for aggressive rate cuts have been reduced,'' said Warren Hogan, head of economics at ANZ Bank in Sydney. ``We're still comfortable with the view that the RBA will go 50 in November.''

Rates, Bonds

Benchmark interest rates are 6 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 1.6 percent in the U.S., luring investors to the South Pacific nations' assets. The risk in such trades is that exchange-rate fluctuations may erase profits.

Australian government bonds rose. The yield on the benchmark 10-year note fell 9 basis points to 5.263 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 advanced 0.702, or A$7.02 per A$1,000 face amount, to 99.891. A basis point is 0.01 percentage point.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.305 percent today from 6.285 at the end of last week.

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