Aussie Falls to Lowest Since 2011 as U.S. Yield Spread Narrows

Australia’s dollar fell to the lowest since October 2011 versus its U.S. peer after the 10-year yield spread between the two countries’ debt narrowed to the least in more than four years on signs the American economy is improving.

Local bonds fell, with the 10-year rate climbing to a 2-month high, after U.S. Treasury benchmark yields rose to the most since April 2012. The Aussie weakened to a more-than four-year low against its New Zealand counterpart. Pacific Investment Management Co., which runs the world’s biggest bond fund, said it expects further interest rate cuts by the Reserve Bank of Australia as mining investment cools.

“The diminishing yield differential is one argument for the Aussie’s move lower,” said Michael Turner, a debt strategist at Royal Bank of Canada in Sydney. “There certainly seems to be some downside risk to growth in Australia. The risk is skewed for more easing by the RBA.”

The Australian dollar touched 95.36 U.S. cents, the weakest since October 2011, before trading at 95.38 at 3:53 p.m. in Sydney, 0.8 percent below yesterday’s close. It fell 0.6 percent to NZ$1.1840 after earlier dropping to NZ$1.1837, the lowest since January 2009. The Aussie weakened 0.8 percent to 97.78 yen. New Zealand’s dollar slid 0.2 percent to 80.57 U.S. cents and lost 0.3 percent to 82.45 yen.

Australia’s 10-year bond yield rose 15 basis points or 0.15 percentage point to 3.47 percent, after touching 3.5 percent, the highest since March 27. The U.S. Treasury 10-year yield rose to 2.23 percent today, a level unseen since April 2012. The spread between the two narrowed to 116 basis points yesterday, the least since November 2008.

U.S Economy

Data yesterday showed consumer confidence in the U.S. climbed to the highest level in more than five years and home prices advanced by the most in seven.

Interest-rate swaps data compiled by Bloomberg show traders see a 32 percent chance the RBA will lower its benchmark to 2.5 percent at the next meeting on June 4.

“The expected decline in mining investment will likely leave a significant economic hole in the short term that needs to be filled,” portfolio managers Adam Bowe and Robert Mead wrote in an article on Newport Beach, California-based Pimco’s website. “We believe that lower interest rates will likely be required to support domestic demand as Australia transitions away from mining-assisted growth.”

Leading Indicator

Westpac Banking Corp. and the Melbourne Institute said today an Australian index of leading economic indicators for March rose 0.2 percent to 290.3 from the previous month, when it increased 0.6 percent.

The value of total construction work declined 2 percent in the three months to March 31 after a revised 0.1 percent gain in the previous quarter, the statistics bureau said today. That compared with a 1 percent increase estimated by economists surveyed by Bloomberg News.

New Zealand’s two-year swap rate, a fixed payment made to receive a flowing rate, was little changed at 3.01 percent.

“Investors are pricing in normalization from the RBNZ,” RBC’s Turner said of New Zealand’s central bank. “ There are some easily identifiable reasons to be positive in New Zealand, whereas in Australia there’s a bit of uncertainty on how it will shift away from the mining sector.”

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