Australian, New Zealand Dollars Soar on Deposit Guarantee Plans

By Candice Zachariahs
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Oct. 13 (Bloomberg) -- The Australian currency soared the most since it began freely trading and New Zealand's also advanced after the nations' governments guaranteed bank deposits and European leaders agreed to back bank debt.

The South Pacific currencies advanced against the yen after leaders of the 15 countries using the euro agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, prompting speculation investors will resume buying the nations' high-yielding assets using funds from Japan.

``It's definitely given confidence a boost,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``This is the knee-jerk reaction. For it to continue, we need to see evidence that financial markets are freeing up and stabilizing.''

The currencies dropped last quarter by the most since 2000 as the global credit squeeze prompted investors to dump riskier assets. Australia's dollar dropped 17 percent against the greenback in the three months to Sept. 30 and New Zealand's slid 12 percent.

The Australian dollar jumped 5.7 percent, the most since 1983 when a peg to the U.S. dollar was scrapped, to 68.02 U.S. cents as of 10:17 a.m. in Sydney, from 64.32 cents late on Oct. 10 in New York. The currency rose 5.6 percent to 68.40 yen, from 64.76.

New Zealand's dollar gained 2.8 percent to 61.13 U.S. cents from 59.45 cents in New York last week. It was 2.7 percent higher at 61.49 yen.

Deposit Guarantees

The Australian dollar rose as Prime Minister Kevin Rudd said yesterday his government will guarantee all deposits with financial institutions for the next three years to bolster confidence in the banking system. The government will also guarantee all ``term wholesale funding'' by Australian banks operating in international credit markets.

The New Zealand government yesterday said it will guarantee retail deposits in New Zealand-registered banks, in building societies, credit unions and deposit-taking finance companies.

The Australian dollar rose 3 percent to NZ$1.1132 from NZ$1.0807 in New York on Friday, when it touched NZ$1.0614, its weakest since December 2005.

``The aussie-kiwi cross is a screaming buy at these levels,'' said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Sydney, referring to the currencies by their nicknames. ``If we do see these plans gain more traction and, critically, funding markets start to calm down somewhat, we'll see aussie-kiwi pushing higher.''

He forecasts the Australian dollar will strengthen to between NZ$1.15 and NZ$1.16.

European Leaders

The currencies also rose after European leaders announced measures to stabilize markets including a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any ``systemically'' critical banks in distress.

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., luring investors to buy the South Pacific nations' assets using loans in lower-cost currencies such as the yen. The risk in such so-called carry trades is that exchange-rate fluctuations may erase profits.

Australian government bonds fell. The yield on the benchmark 10-year note rose 13 basis points to 5.272 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 declined 1.064, or A$10.64 per A$1,000 face amount, to 99.820. 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 6.425 percent today from 6.416 at the end of last week.

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