Aussie, Kiwi Dollars Gain as Volatility Drops, Stocks Advance

The Australian and New Zealand dollars extended gains to a third day as a drop in volatility and rising stocks supported demand for higher-yielding assets.

The Aussie strengthened versus most of its 16 major counterparts after a measure of volatility for the currency dropped to the least in almost two months. New Zealand’s kiwi touched the strongest level in five weeks after an equivalent volatility gauge touched the lowest since May.

“I’m not too surprised to see the Aussie trading at the firmer end” of its recent range, said Ray Attrill, the Sydney-based global co-head of currency strategy at National Australia Bank Ltd. “Declining volatility is giving a little bit of support to higher-yielding currencies.”

The Australian dollar advanced 0.1 percent to 92.62 U.S. cents as of 4:45 p.m. in Sydney after rising 0.9 percent over the previous two days. It was little changed at 92.20 yen. New Zealand’s currency gained 0.4 percent to 79.96 U.S. cents after earlier touching 80.07, the highest since June 19. It advanced 0.3 percent to 79.60 yen.

The MSCI Asia Pacific Index of shares rose 1 percent, set for its biggest one-day gain since July 11.

One-month volatility for the Aussie dropped to as low as 11.1 percent, the least since May 30. The equivalent rate for the kiwi touched 11.45 percent, a level unseen since May 16.

Australia’s shorter-dated bonds, among the most sensitive to interest-rate changes, held recent gains before a report tomorrow that may show inflation is in check, giving the Reserve Bank room to lower borrowing costs.

Yields Drop

Australia’s three-year yield touched 2.57 percent, the lowest since June 18, before closing at 2.59 percent, down 11 basis points from a week earlier. The 10-year yield was at 3.66 percent, from 3.75 percent on July 16.

The trimmed mean gauge of core consumer prices gained 2.1 percent in the second quarter from a year earlier, after rising 2.2 percent in the previous period, according to the median forecast of economists surveyed by Bloomberg News. Inflation as measured by the consumer price index may have accelerated 2.5 percent over the same period.

The difference between yields on benchmark 10-year Australian notes and same-maturity inflation-linked bonds, a gauge of trader expectations for consumer prices over the life of the debt, dropped two basis points to 2.46 percentage points. That compares with a a close of 2.28 percentage points on June 25, the least in nine years, and an average of 2.77 percentage points in the past decade.

Inflation Risks

“The risk for the market tomorrow is more skewed towards a stronger-than-expected inflation outcome,” Zoe McHugh, an interest-rate strategist at Australia & New Zealand Banking Group Ltd. in Sydney, wrote in an e-mailed note to clients. “We think the market has moved too low now and recommend buying 10-year inflation on any dip back towards 2.35 percent, given the potential for the market to move back towards 2.50/2.60 percent.”

Traders see a 76 percent chance RBA policy makers will lower the central bank’s benchmark rate by 25 basis points to 2.5 percent at their next meeting on Aug. 6, according to interest-rate swaps data compiled by Bloomberg. Reserve Bank of New Zealand Governor Graeme Wheeler, who is due to announce a policy decision on July 25, will keep his country’s borrowing costs at a record-low 2.5 percent, the data show.

“The New Zealand dollar remains our favorite currency,” Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities Inc., wrote in an e-mailed note to clients. “Even though the RBNZ is determined to delay tightening for now, it merely delays the inevitable.”

TD sees the New Zealand central bank raising its benchmark rate in March 2014, which would be the first increase since July 2010, and lifting it to 3.5 percent by the end of next year, Beacher wrote.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates that is sensitive to interest-rate expectations, rose 2 1/2 basis points to 3.18 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE