Australian, New Zealand Dollars Gain on Interest-Rate Advantage

By Candice Zachariahs

Dec. 18 (Bloomberg) -- The Australian and New Zealand dollars gained for a fourth day against the U.S. currency on speculation investors sought higher-yielding assets after the Federal Reserve cut interest rates to as low as zero this week.

The currencies rose for a second day versus the yen as Japanese Finance Minister Shoichi Nakagawa said his government is ready to take action in the market “if needed,” sending the yen down from near a 13-year high against the U.S. dollar. The difference in yield between 10-year Australian and U.S. government debt widened to the most since September while the spread in New Zealand was the biggest since April.

“Even with sharp falls in interest rates in Australia and New Zealand, both countries still enjoy positive rate differentials compared to the U.S.,” said Mike Symonds, head of currency trading at Bank of New Zealand Ltd. in Wellington. “The U.S. dollar is markedly weaker again and that’s helped support currencies like the Aussie and kiwi.”

Australia’s currency advanced 1.4 percent to 70.48 U.S. cents as of 1:30 p.m. in Sydney from 69.54 cents late in Asia yesterday. It touched 70.79, the highest since Oct. 15. The currency rose 0.6 percent to 61.85 yen.

New Zealand’s dollar gained 2.1 percent to 59.35 U.S. cents from 58.18 in Asia yesterday. It touched 59.57 U.S. cents, the highest since Nov. 11 and bought 52.03 yen.

Annual Losses

The Australian dollar dropped 20 percent against the U.S. dollar in 2008 and 37 percent versus the yen as slumping commodities and a global recession prompted investors to pare holdings of the nation’s assets. New Zealand’s currency declined 23 percent versus its U.S. counterpart and 40 percent against the yen.

Benchmark interest rates are 4.25 percent in Australia and 5 percent in New Zealand, compared with 0.3 percent in Japan and as low as zero percent in the U.S.

The Fed lowered its target rate yesterday to a range of zero to 0.25 percent, from 1 percent, and reiterated plans to purchase agency debt and mortgage-backed securities.

The Reserve Bank of Australia has reduced borrowing costs by three percentage points since early September and said monetary policy is at an “expansionary setting” in the minutes to its last meeting released Dec. 16.

National Bank of Australia Ltd., the nation’s biggest bank by assets, raised its forecasts for the Australian dollar and recommended investors buy the currency as it may strengthen against the greenback, yen and euro.

Aussie Outlook

The Aussie, as it’s called, will gain to 79 U.S. cents, 73 yen and 55 euro cents by the end of 2009, wrote Sydney-based John Kyriakopoulos, head of currency strategy at National Australia Bank, in a research note dated Dec. 17. Australia’s dollar bought 48.91 euro cents from 49.21 yesterday.

The Reserve Bank of Australia bought A$134 million ($95 million) of its own currency in November, the second straight month of net purchases, according to the central bank’s monthly bulletin today.

The interventions weren’t “designed to defend any particular level,” the RBA said last month after purchasing A$3.15 billion in October, the biggest amount on record. The central bank hasn’t been a net buyer of the Australian dollar in the market since 2001, according to RBA data.

In New Zealand, the government said its budget deficit will be wider than previously forecast as the economy’s longest recession in 18 years erodes tax revenue and increases welfare payments. The cash deficit will be NZ$6.63 billion ($3.6 billion) in the year ending June 30, 2009, up from NZ$5.9 billion predicted in October, the government said in its economic and fiscal update released in Wellington today. The shortfall will increase to NZ$11.38 billion by the 2013 fiscal year.

Australian government bonds rose for a third day with the yield on the 10-year note falling four basis points to 4.10 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 gained 0.339, or A$3.39 per A$1,000 face amount, to 109.539.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was unchanged at 4.65 percent.

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