Australian Dollar Trades Near Two-Month Low as Rate Cut Looms

Feb. 3 (Bloomberg) -- The Australian dollar traded close to a two-month low and New Zealand’s neared its weakest in six years on speculation the Reserve Bank of Australia will cut interest rates more than economists estimate to the lowest since the 1960s.

Australia’s currency tumbled 11 percent in the past month after the central bank lowered borrowing costs by 3 percentage points since September. The median forecast of 20 economists surveyed by Bloomberg News is for a 1 percentage point reduction to 3.25 percent. Traders are betting on a 54 percent chance of a bigger cut, according to a Credit Suisse Group index based on swaps trading.

“Central banks around the world have been surprising everyone and the risks are for a cut of greater than 100 basis points from the RBA,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interbank broker. “Coming into the meeting you will probably see some Aussie dollar weakness,” he said, referring to the currency by its nickname.

Australia’s currency traded at 63.23 U.S. cents as of 11:49 a.m. in Sydney from 62.72 cents late in Asia yesterday. It earlier touched 62.57 U.S. cents, close to yesterday’s two-month low of 62.49 cents. The currency advanced 1.3 percent to 56.51 yen after falling 3 percent yesterday.

New Zealand’s dollar dropped to 49.62 U.S. cents, the weakest since November 2002, before trading at 50.60 cents from 49.92 cents in Asia yesterday. It slid to 44.31 yen, close to yesterday’s eight-year low of 44.25, before buying 45.22 yen.

Interest Rates

Higher interest rates in Australia and New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attract investors to the South Pacific nations’ higher-yielding assets. The risk in such so-called carry trades is that currency market moves will erase profits. New Zealand’s cash target is at 3.5 percent, after its central bank cut the benchmark by 1.5 percentage points on Jan. 29.

Investors should buy the Australian dollar against New Zealand’s as it may rise as much as 4 percent toward NZ$1.30, Barclays Capital said today. They should exit the trade if the currency weakens to NZ$1.2390 per Australian dollar.

“We do not think that the RBA has to follow the RBNZ, as Australian economic data have been holding up relatively well and there is more room for fiscal stimulus in Australia,” wrote David Forrester, a currency economist at Barclays in Singapore, in a research note sent to clients today.

Trade Surplus Narrows

Australia’s trade surplus narrowed in December by more than economists forecast as coal and metal exports declined, the Bureau of Statistics said in Sydney today. The surplus shrank to A$589 million ($372 million) from a revised A$979 million in November. The median estimate of 16 economists surveyed by Bloomberg was for A$1.1 billion.

The Australian government will announce its second stimulus package since September at 12:30 p.m., Treasurer Wayne Swan said. The package adds to A$44.72 billion in spending announced in the past five months. Prime Minister Kevin Rudd said yesterday the nation faces its first budget deficit since 2001.

The budget gap and an “expected sharp widening in the current account deficit this year,” will weigh on the Australian dollar, wrote Greg Gibbs, director of foreign-exchange strategy at ABN Amro Australia Ltd. in Sydney, in a research note today.

New Zealand’s dollar fell as consumer confidence sank to a 10-year low amid a deepening recession, according to a survey by UMR Research. Seventy-two percent of 750 people surveyed in late January expect the economy to get worse this year, up from 56 percent in December, UMR said in a report.

New Zealand Recession

New Zealand’s economy will remain in recession until at least March 31, the Treasury Department said yesterday.

Australian government bonds advanced. The yield on the 10- year note fell three basis points, or 0.03 percentage point, to 4.06 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 rose 0.294, or A$2.94 per A$1,000 face amount, to 109.751.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 3.27 percent from 3.32 percent yesterday.

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

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