AUD Gains After Rate Cut

Published on Bloomberg: Australia’s Dollar Strengthens After Rate Cut, Stimulus Plan

• Feb. 3 (Bloomberg) -- The Australian dollar gained after the central bank cut interest rates to the lowest since 1964 and the government announced a stimulus package to avoid a recession. New Zealand’s currency rose from near a six-year low.
  
  The Australian dollar ended three days of losses as the government said it will spend A$42 billion ($26.7 billion) on grants and infrastructure to counter the impact of the global financial crisis. The Reserve Bank of Australia lowered its benchmark rate 1 percentage point to 3.25 percent, two hours after the stimulus package was announced.
  
  The combination of fiscal and monetary stimulus “is going to be a positive for the currency,” said David Forrester, a currency economist at Barclays Capital in Singapore. “I wouldn’t be surprised to get above 64 U.S. cents against the dollar but meet resistance there.”
  
  Australia’s currency climbed to 63.92 U.S. cents as of 3:11 p.m. in Sydney from 62.72 cents late in Asia yesterday. The currency advanced 2.7 percent to 57.29 yen after falling 3 percent yesterday. It may advance towards 60 yen, Forrester said.
  
  New Zealand’s dollar gained to 50.73 U.S. cents from 49.92 cents yesterday. It earlier touched 49.62 U.S. cents, the weakest level since November 2002. It rose to 45.43 yen from 44.40 yen yesterday.
  
  Australia’s stimulus package includes A$12.7 billion in grants to families and low-income earners and A$28.8 billion for infrastructure. It will help send the nation’s budget into a A$22.5 billion deficit, the first shortfall since fiscal 2001-02.
  
  Avoiding Recession
  
  The economy would contract in 2009-10 without today’s stimulus, current Treasury forecasts show. The stimulus package will help the economy grow 1 percent this fiscal year and 0.75 in the year ending June 30, 2010, according to the Treasury.
  
  “The Australian dollar can rally a bit further up to 64 to 66 U.S. cents,” said Greg Gibbs, director of foreign-exchange strategy at ABN Amro Australia Ltd. in Sydney said after the stimulus was announced. “From there the realities of a slowing global economy and worsening terms of trade will remain important factors driving the currency lower again.”
  
  Australia’s trade surplus narrowed in December by more than forecast as coal and metal exports declined, a government report showed today. The surplus shrank in December to A$589 million from a revised A$979 million in November.
  
  Australia’s currency tumbled 31 percent over the past six months as the central bank has lowered its benchmark from a 12- year high of 7.25 percent since September.
  
  Carry Trades
  
  Higher interest rates in Australia and New Zealand, compared with 0.1 percent in Japan and as low as zero percent in the U.S., attract investors to the South Pacific nations’ higher-yielding assets. New Zealand’s central bank cut its benchmark 1.5 percentage points to 3.5 percent on Jan. 29.
  
  The currencies also advanced against the yen after the Bank of Japan said it will resume a program of buying shares held by financial institutions, raising speculation investors will buy assets offering higher returns. The bank will purchase 1 trillion yen ($11.1 billion) in equities through April 2010 and hold them until March 2012 at the earliest, it said after its policy board met in Tokyo today.
  
  New Zealand’s dollar earlier traded near an eight-year low versus the yen after an industry survey showed consumer confidence sank to the least in a decade. Seventy-two percent of 750 people surveyed in late January expect the economy to worsen this year, up from 56 percent in December, UMR Research said.
  
  New Zealand’s economy will remain in recession until at least March 31, the Treasury Department said yesterday.
  
  Australian government bonds declined, pushing the yield on the 10-year note up seven basis points, or 0.07 percentage point, to 4.17 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.631, or A$6.31 per A$1,000 face amount, to 108.826.
  
  New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 3.32 percent.