By Candice Zachariahs
Jan. 29 (Bloomberg) -- New Zealand’s dollar dropped to the lowest in a week 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.
Australia’s dollar advanced against the yen for a fourth day as equities rose on speculation U.S. President Barack Obama will set up a so-called bad bank to take toxic assets off bank balance sheets. 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.
“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 51.90 U.S. cents from 53.03 cents before the decision and traded at 52.21 U.S. cents as of 11:07 a.m. in Sydney. It bought 47.23 yen from 47.06 yesterday in late Asian trading.
Australia’s currency fell 0.2 percent to 66.48 U.S. cents from 66.62 cents late in Asia yesterday. The currency rose 1.1 percent to 60.15 yen. It reached as high as NZ$1.2748, the highest since August 2008, before trading at NZ$1.2729, up 0.7 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.
Australian Rates
The Reserve Bank of Australia meets Feb. 3 and traders are betting it will lower its benchmark rate 1 percentage point from 4.25 percent, according to a Credit Suisse Group index based on swaps trading. That would be the lowest since the bank started setting cash rate targets in 1990 and 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.
The Australian and New Zealand currencies earlier advanced against the dollar as the Standard & Poor’s 500 index rose for a fourth day, its longest stretch of gains since November.
They strengthened against the yen as the U.S. House of Representatives passed President Obama’s $819 billion stimulus package, bolstering investor appetite for higher-yielding assets. The 244-188 vote sends the measure to the Senate, where Obama urged lawmakers to work out their differences in the next few weeks, saying delays would only cost more people their jobs.
Better Sentiment
“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.
The Federal Open Market Committee said yesterday it is “prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.”
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 3.28 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. “We would expect any further reductions to be smaller than those seen recently.”
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 0.227, or A$2.27 per A$1,000 face amount, to 119.592.
To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
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