New Zealand Dollar Drops to 6-Year Low, Australia’s Also Falls

By Candice Zachariahs

Jan. 29 (Bloomberg) -- New Zealand’s dollar dropped to a six-year low after the central bank cut interest rates by a larger-than-forecast 1.5 percentage point, reducing the appeal of the nation’s assets. The Australian currency also fell.

The currencies fell as the Reserve Bank of New Zealand slashed rates to a record low 3.5 percent in a decision that was forecast by three of 13 economists surveyed by Bloomberg News. Traders are betting Australia’s central bank will cut it cash target 1 percentage point to 3.25 percent when it meets Feb. 3.

“It has been a surprise for the market and we’ve seen the currency fall quite dramatically on the back of that,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “The currency will remain under pressure.”

New Zealand’s dollar slid as low as 51.53 U.S. cents, the weakest since December 2002, before trading at 51.84 cents as of 4:11 p.m. in Sydney. It bought 46.57 yen from 47.06 yesterday in late Asian trading.

Australia’s currency fell 0.9 percent to 66.01 U.S. cents from 66.62 cents late in Asia yesterday. The currency fell 0.3 percent to 59.32 yen. It strengthened to NZ$1.2786, the highest since August 2008, before trading at NZ$1.2736, up 0.8 percent from yesterday.

Higher interest rates in New Zealand and Australia, compared with as low as zero in the U.S. and 0.1 percent in Japan, attract investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Current Account Deficit

“As interest rates go lower in New Zealand the financing of its current account deficit (over 8 percent of GDP) will come more into focus and weigh on the currency,” wrote a team of analysts at Barclays Capital led by Singapore-based David Forrester. Barclays forecasts the so-called kiwi will drop as low as 48 U.S. cents.

It may fall to NZ$1.30 per Australian dollar in the coming weeks especially if the RBA is less aggressive than market expectations, the analysts wrote.

A Credit Suisse Group index based on overnight swaps trading shows the market is betting on a 1 percentage point cut from the RBA. That would take the rate to the lowest since the bank started setting cash rate targets in 1990 and to the cheapest benchmark borrowing cost since 1964. Rates in Australia are now higher than in neighboring New Zealand for the first time since January 2004.

Standard & Poor’s lowered the outlook for New Zealand’s foreign-currency credit rating on Jan. 13 citing concern that the nation’s current account deficit and overseas debt may curb growth and investment.

New Zealand dollar has fallen 11 percent against the dollar and yen this year, adding to last year’s declines of 24 percent and 39 percent, respectively. Australia’s currency has weakened 6 percent versus the dollar and 7 percent against the yen in January, adding to losses last year of 20 percent and 35 percent.

Better Sentiment

The Australian and New Zealand currencies earlier advanced against the dollar and yen as the Standard & Poor’s 500 index rose for a fourth day, its longest stretch of gains since November. The U.S. House of Representatives yesterday passed President Obama’s $819 billion stimulus package, bolstering investor appetite for higher-yielding assets.

“We’ve had an improvement in sentiment toward the global economy linked to hopes of more aggressive policy responses, particularly in the U.S.,” said John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney. The Australian dollar could “gain modestly” and advance toward 68.5 cents over the next week, he said.

U.S. policy makers held their target lending rate in a range of zero to 0.25 percent.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, dropped to 3.33 percent from 3.51 yesterday, after the central bank signaled further reductions ahead.

Market participants expect the benchmark rate “will go a little lower then trough and they may be correct in that,” RBNZ Governor Alan Bollard said.

Australian government bonds declined. The yield on the 10- year note rose three basis points, or 0.03 percentage point, to 4.08 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.218, or A$2.18 per A$1,000 face amount, to 109.601.

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