New Zealand, Australian Dollars Plunge as Carry Trades Dumped

By David McIntyre

July 27 (Bloomberg) — New Zealand’s dollar slumped the most versus the yen since 2005 and Australia’s by the most in almost five months as a rout in global stocks prompted investors to cut holdings of higher-yielding assets bought with Japan’s currency.

The two currencies are favorites of the so-called carry trade because their interest rates are among the highest of major economies. New Zealand’s dollar dropped to a six-week low and Australia’s to the least in almost a month versus the yen after investors rushed to buy safer assets as U.S. stocks fell the most since February.

There is more downside to come for these two currencies,'' said Paul Milton, chief dealer at Societe Generale SA in Sydney.The carry unwind needed some sort of trigger and equities brought that.’’

New Zealand’s dollar slumped 3.2 percent, the biggest fall since Dec. 15, 2005, to 92.65 yen at 2:50 p.m. in Tokyo from 95.75 yen in Asia yesterday. It also dropped 2 percent to 78 U.S. cents from 79.60 cents, a third day of losses since reaching 81.10 cents on July 24, the strongest since the currency started trading freely in March 1985.

The Australian dollar fell 2.9 percent, the most since March 5, to 103.26 yen from 106.36 yen yesterday. It declined 1.5 percent to 87.09 U.S. cents from 88.42 cents after reaching 88.71 cents on July 25, the highest since February 1989.

The currencies pared losses as Japanese investors took the opportunity to buy at lower levels.

It was the Japanese retail investors saying `these are cheap,''' said Ray Attrill, director of foreign exchange research at Forecast Ltd. in Sydney. Relative Interest-Rates Japan's 0.5 percent overnight lending rate, the lowest of any major economy, compares with New Zealand's 8.25 percent and Australia's 6.25 percent benchmark rates. That's helped New Zealand's dollar advance 31 percent and Australia's 18 percent versus the yen over the past 12 months. The New Zealand dollar has dropped 4.3 percent against the yen since July 25, erasing half the annual gain offered by the rate differential with Japan. The Standard & Poor's 500 Index fell 2.3 percent, the most since February, while the FTSE 100's biggest drop in four years led losses across Europe. The Morgan Stanley Capital International Asia Pacific Index of shares declined 2.6 percent. `More to Come' The decline in equities and accompanying risk aversion hadinfected the classic carry traders’’ such as the Australian and New Zealand dollars, said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. Unfortunately there's more to come.'' The Australian dollar-yen cross had a correlation of 0.95 with the Asia-Pacific stock index over the last 12 months, according to Bloomberg data. The New Zealand dollar-yen cross also had a correlation of 0.95 with Asian stocks. A reading of 1 suggests they move lock step. Deutsche Bank AG, the world's largest foreign-exchange trader, advised clients to sell the New Zealand dollar against the yen as investors buy back the Japanese currency used to fund purchases of higher-yielding assets. The bank also advised clients to buy Australia's dollar versus New Zealand's, while canceling its recommendation to purchase the Australian dollar against the U.S. currency.With U.S. equity markets turning lower, risk-aversion related yen strength is now the dominant theme,’’ John Horner, a currency strategist in Sydney, wrote in a research note to clients. ``We expect yen strength to particularly weigh on the kiwi,’’ he said, referring to the New Zealand dollar by its nickname.

Government bonds of the two nations surged, with the yield on Australia’s benchmark 10-year note plunging 15 basis points, or 0.15 percentage point, to 5.99 percent, the lowest since May 28. New Zealand’s equivalent yield also fell 14 basis points to 6.68 percent. Bond yields move inversely to prices.

To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net
Last Updated: July 27, 2007 02:05 EDT

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