Australia, N.Z. Dollars Set for 2nd Weekly Loss on Bank Concern

By Candice Zachariahs

Feb. 20 (Bloomberg) -- The Australian and New Zealand dollars headed for a second weekly drop against the U.S. currency as concern over banks’ vulnerability to worsening eastern European economies pushed down higher-yielding assets.

New Zealand’s dollar dropped for a second day after the Treasury Department said the cash budget deficit was wider than expected at the end of December amid a decline in tax revenue. The Australian dollar briefly pared losses after central bank governor Glenn Stevens said the nation’s economy will recover later this year.

“The next stage of the global banking crisis is we start to question whether we have a coordinated cross-border plan for Europe,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. “A material move lower in the euro would weigh on the Aussie and Kiwi,” he said, referring to the currencies by their nicknames.

Australia’s currency declined 2.6 percent to 64.17 U.S. cents as of 2:22 p.m. in Sydney from late last week in New York. It traded at 60.45 yen from 60.33 yen on Feb. 13. New Zealand’s dollar slid 3.3 percent to 50.53 U.S. cents, and was at 47.60 yen from 48.03 yen.

The two South Pacific currencies fell this week after Moody’s Investors Service said on Feb. 17 it may cut the ratings of some banks with units in eastern Europe, including Austrian and Swedish lenders. The rating company’s report sent the euro to a 10-week low that day.

‘Powerful’ Stimulus

Demand for Australia’s dollar increased after Stevens said interest rates at a 45-year low will provide a “powerful” stimulus to the economy. After his comments, traders reduced bets to zero that the RBA will cut rates by more than 50 basis points at its March 3 meeting, according to a Credit Suisse index based on swaps.

The central bank governor also said the economy of China, Australia’s largest trading partner, is showing “tentative” signs of improvement. Sentiment in global financial markets remains fragile, he added.

Stevens “indicated that they’re prepared to pause in their interest-rate cycle,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia. “There are ongoing concerns about what’s happening in the global economy so the currency is only going to grind higher rather than shoot higher.”

Benchmark interest rates are 3.25 percent in Australia and 3.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

The central bank will keep borrowing costs on hold at its March meeting, before cutting its benchmark rate to 2.75 percent in April, Commonwealth Bank predicts.

N.Z. Dollar

New Zealand’s dollar fell after the Treasury said the cash deficit was NZ$8.26 billion ($4.18 billion) in the six months ended Dec. 31, or NZ$856 million more than was forecast in December. The economy is shrinking for a fifth straight quarter, Finance Minister Bill English said Feb. 18.

The Australian dollar advanced versus the yen this week as an increase in the risk of holding Japanese corporate debt deterred overseas investors from buying the nation’s assets.

The rising cost to protect buyers of Japan’s sovereign bonds against default signals the yen may start to lose its status as a “haven” currency, Barclays Capital, the world’s third-largest foreign-exchange trader, said yesterday.

Debt Sale

Australia sold A$599 million ($385 million) of June 2011 bonds today at a weighted average yield of 2.93 percent in the fifth auction of its expanded borrowing program. Buyers submitted offers for 4.5 times the amount of debt on offer, the Australian Office of Financial Management said.

Australian government bonds were little changed. The yield on the benchmark 10-year note fell one basis points, or 0.01 percentage point, to 4.21 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 0.089, or A$0.89 per A$1,000 face amount, to 108.25.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 3.29 percent from 3.27 yesterday.

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