Aussie Drops to Five-Year Low Versus Kiwi as Economies Diverge

Australia’s dollar dropped to a five-year low against its New Zealand peer after the nation’s central bank said it maintained the option of loosening policy further and the government’s budget deficit widened.

The Aussie traded within one cent of the three-year low of 88.48 U.S. cents reached in August, before Reserve Bank of Australia Governor Glenn Stevens testifies to the House of Representatives Economic Committee tomorrow. Stevens last week marked out 85 cents as a level he’d prefer. New Zealand’s dollar rose against all of its 16 major peers after the government projected a bigger budget surplus.

“There’s a big contrast between Australia and New Zealand at the moment. The RBA minutes and New Zealand budget update reinforced that,” said Jonathan Cavenagh, a Singapore-based foreign-exchange strategist at Westpac Banking Corp. “We’re probably going to trend towards the NZ$1.05-NZ$1.06 region” in two to three months, Cavenagh said.

The Australian currency declined 0.3 percent to NZ$1.08 as of 5:18 p.m. in Sydney from yesterday, after touching NZ$1.0786, the lowest since October 2008. The Aussie was little changed at 89.47 U.S. cents from yesterday after dropping to 89.10 on Dec. 13, a level unseen since Aug. 30. It declined 0.1 percent to 92.12 yen. The kiwi advanced 0.3 percent to 82.85 U.S. cents. It strengthened 0.3 percent to 85.31 yen.

Australian bonds fell after the government said the budget deficit will increase to A$47 billion ($42 billion) in the year through June. The underlying cash deficit compared with an August projection of a A$30.1 billion shortfall, according to the government’s mid-year economic forecast released in Canberra today. Prime Minister Tony Abbott said in Sydney today Australia faces a decade of budget deficits.

Moody’s Comment

The changes in Australia’s budget forecast are credit negative, Steven Hess, senior vice president Moody’s Investors Service, wrote in a report today. Today’s update has “somewhat worse” projections than Moody’s expected on fiscal and debt positions, he wrote.

The nation’s 10-year yield rose as much as six basis points, or 0.06 percentage point, to 4.29 percent. The rate on similar-maturity New Zealand bonds fell 10 basis points to 4.73 percent, the lowest since Nov. 21.

The Aussie dollar has dropped 12 percent this year, the steepest decline after the yen among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes. The kiwi has climbed 3.6 percent.

Options Open

Policy makers didn’t want to “close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity,” the RBA said, referring to the cash target rate in minutes released today of its Dec. 3 meeting, when it held borrowing costs at a record-low 2.5 percent.

Governor Stevens said last week that “it’s probably more preferable” to support the economy via a weaker currency than with further rate cuts. An exchange rate of 85 U.S. cents is “closer to the mark” than 95 cents, he said in an interview with the Australian Financial Review.

Interest-rate swaps data compiled by Bloomberg show traders see a 16 percent chance the RBA will lower its benchmark from 2.5 percent at the next meeting in February.

In New Zealand, the operating surplus will be NZ$86 million ($71 million) in the year through June 2015 and rise to NZ$1.67 billion a year later, Finance Minister Bill English said in a fiscal update released in Wellington today. That compares with May’s projections of NZ$75 million and NZ$797 million. The surplus will grow to NZ$5.6 billion in 2018, the new forecasts show.

“The signs are now pretty evident that growth has picked up appreciably,” English told reporters in Wellington. The government will continue to exercise spending restraint “to ensure this fiscal and economic momentum can endure,” he said.

New Zealand’s two-year swap rate, a fixed payment made to receive a floating rate, slid 2 basis points to 3.78 percent.

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