By Candice Zachariahs
Nov. 21 (Bloomberg) -- The Australian and New Zealand dollars dropped as U.S. stocks sank to an 11 year-low, prompting investors to dump higher-yielding assets. The Reserve Bank of Australia intervened to buy its own currency.
The New Zealand dollar plunged to its lowest since 2001 against the yen and traded near a six-year low against the dollar as the Standard and Poor's 500 index extended its 2008 tumble to 49 percent. The RBA intervened as the Australian dollar slid close to a five-year low against the greenback.
``The global economy looks like a bit of a train wreck at the moment,'' said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Sydney. ``Currencies like Aussie and kiwi are very linked with the fortunes of the global economy,'' he said referring to the currencies by their nicknames.
Australia's currency dropped as low as 60.76 U.S. cents, close to the low of 60.1 cents touched Oct. 28, before trading at 61.11 cents as of 12:25 a.m. in Sydney. It has dropped 5.8 percent from 64.81 cents in New York trading on Nov. 14. The currency has plunged 8.5 percent to 57.58 yen from 62.96 late last week. The Australian dollar has a ``date with sub-60 cents,'' in the next few weeks, said Cavenagh.
New Zealand's dollar slid 5.3 percent this week to 52.39 U.S. cents. It slumped 8.1 percent to 49.35 yen.
The RBA bought its own currency this morning, ``providing liquidity as on previous occasions,'' said a spokesman for the Sydney-based central bank. He declined to be identified.
The central bank bought A$3.15 billion ($2 billion) of its own currency in October, the biggest net purchase on record, as the Australian dollar posted a record monthly drop.
Bond Yields Drop
The Australian and New Zealand currencies have dropped against the yen in four of the past five days as investors dumped higher yielding assets amidst increased concern over a global recession and expectations of more interest rate cuts from both central banks in December.
Australian government bonds advanced, sending yields down amid speculation the RBA will slash interest rates. The yield on the benchmark 1-year bill dropped 23 basis points to 2.72 percent, according to data compiled by Bloomberg. The yield on the benchmark 10-year note declined 20 basis points to 4.56 percent, according to data compiled by Bloomberg. A basis point equals 0.01 percentage point.
New Zealand's two-year swap rate, a fixed payment made to receive floating rates, declined to 5.20 percent today from 5.35 yesterday.
Traders are betting that the Reserve Bank of New Zealand will lower interest rates 100 basis points next month, with an 80 percent chance of 125 points, according to a Credit Suisse index based on overnight swaps trading.
Interest Rates
A separate Credit Suisse index shows bets on at least a 100 basis point cut from the RBA on Dec. 2, with a 56 percent possibility of a 125 point reduction.
Benchmark interest rates are 5.25 percent in Australia and 6.5 percent in New Zealand, compared with 0.3 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.
The currencies also fell as the prices of commodities the nations' export declined. Rising commodity prices spurred by demand from emerging nations like China and India helped the Australian dollar reach a 25-year high of 98.49 cents on July 16. The currency has slumped 38 percent since then as the Reuters/Jefferies CRB Index of 19 raw materials plunged more than 50 percent from a record in July.
Australia & New Zealand Banking Group downgraded its forecast for the Aussie to 54 U.S. cents by the end of 2009. The bank said it may lower that estimate if commodity prices fall further than its current forecasts. ANZ along with BNP Paribas SA have the most bearish end-2009 forecast on the Australian currency among 28 institutions tracked by Bloomberg News.
Dairy Sales
New Zealand's currency fell today as Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, said it may pay its New Zealand milk suppliers 24 percent less this year as demand growth slows. That would remove NZ$2.3 billion or the equivalent of 1.3 percent of gross domestic product from the New Zealand economy, wrote Sue Trinh, a Sydney-based senior currency strategist with RBC Capital Markets, in a research note.
RBC forecasts the Reserve Bank of New Zealand will make a ``bold'' 150 basis point cut its benchmark rate on Dec. 4. ``Risks are skewed towards a bigger, rather than a smaller cut,'' Trinh wrote.
To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
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