Australian Dollar Drops on Bets Recent Gains Came Too Quickly

By Candice Zachariahs

March 25 (Bloomberg) -- The Australian dollar slipped below 70 U.S. cents and New Zealand’s fell for a second day as investors bet the currencies’ longest winning streaks since 2007 may have been overdone.

New Zealand’s currency also slid before a government report tomorrow that economists say will show the nation’s current- account deficit widened to record 9 percent. The shortfall is “uncomfortably large,” Finance Minister Bill English said today.

The South Pacific nations’ currencies weakened as Japan’s exports dropped by a record 49.4 percent in February.

“The falls don’t imply that we’re out of this rally; it’s a retracement from what was a very big move up,” said Amy Auster, head of foreign-exchange and international economics research at Australia & New Zealand Banking Group Ltd. in Melbourne. “The fall below 69.95 this morning suggests a retracement back to 68.55” for the Australian dollar, while New Zealand’s currency may slip toward 55.55 cents, she said.

Australia’s currency bought 69.59 U.S. cents as of 4:46 p.m. in Sydney from 69.55 cents late in New York yesterday. The currency slid 0.2 percent to 67.93 yen.

New Zealand’s dollar declined 0.7 percent to 55.90 U.S. cents from 56.30 in New York yesterday. It was at 54.55 yen from 55.11 yen.

The Australian and New Zealand dollars rose for 10 days through March 23, the longest stretch of gains since at least October 2007. The 14-day relative strength index for both held above 70 on March 23, suggesting a change in price direction was imminent.

Quarterly Decline

The Aussie has declined 0.8 percent this quarter against the dollar, after dropping 11 percent in the three months ending Dec. 31. New Zealand’s currency has weakened 3.4 percent, set for a fourth quarterly decline versus the greenback.

The currencies may rally further in the near-term, said Jonathan Cavenagh, a foreign exchange strategist at Westpac Banking Corp. in Sydney, with the Australian dollar likely to advance toward 72.50 cents over the next month.

“Data, while it’s remained at very depressed levels, on balance has not been shockingly weak,” he said. “We are starting to see some modest upward surprises.”

Purchases of previously owned homes in the U.S. unexpectedly increased 5.1 percent last month, the National Association of Realtors said yesterday.

Up Against Yen

Australia’s dollar has strengthened 6.9 percent versus the yen and is headed for its first quarterly increase in three quarters. The currency slid 24 percent in the final three months of 2008, accelerating from a 17 percent drop in the quarter ended Sept. 30, after the Reserve Bank of Australia slashed interest rates to a 45-year low, cutting 4 percentage points from early September.

“We’ll ultimately see the RBA cut rates to 2 percent or maybe even below because I would anticipate that we have some more serious economic weakness to come, particularly given how much our major trading partners are struggling,” said Stephen Miller, who oversees $2.5 billion of Australian dollar debt at BlackRock Inc. in Sydney.

New Zealand’s dollar, set for a 4 percent increase this quarter against the yen, may pare gains before a report March 27 that will show the nation’s economy shrank 1.1 percent in the fourth quarter, according to economists surveyed by Bloomberg.

Benchmark interest rates are 3.25 percent in Australia and 3 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero percent in the U.S., highlighting the relative attraction of the South Pacific nations’ higher-yielding assets.

Buy Aussie

Investors should buy the Australian dollar versus the euro as the currency may advance to A$1.90 per euro, Greg Gibbs, a currency strategist at RBS Group Australia, wrote in a note to clients today. The currency traded at A$1.9334 from A$1.9365.

“Policy measures taken in the major countries continue to provide a recovery in investor confidence,” wrote Gibbs. At the same time the European Central Bank is “much closer” than the RBA to following the Federal Reserve and Bank of Japan in flooding the economy with funds to keep borrowing costs low, he said. RBA Governor Glenn Stevens will speak on ‘Public Policy and the Payments System’ in Melbourne at 6:30 p.m. today.

Australian government bonds fell for a fourth day. The yield on 10-year notes rose nine basis points, or 0.09 percentage point, to 4.45 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 0.73, or A$7.3 per A$1,000 face amount, to 106.35.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 3.82 percent from 3.69 yesterday.

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