Bloomberg News

Aussie, Kiwi Decline Against Yen After S&P Cuts Italy’s Rating

September 20, 2011

Sept. 20 (Bloomberg) -- The Australian and New Zealand dollars fell against the yen after Standard & Poor’s cut Italy’s credit rating, damping demand for higher-yielding assets.

New Zealand’s dollar weakened against the greenback for a second day before Greece holds a second teleconference with its main creditors over financing. The so-called Aussie briefly erased losses against the U.S. dollar after minutes of the Reserve Bank’s policy meeting this month said the central bank is “well placed” to respond to global and domestic economic risks or inflation.

“Italy’s rating cut confirms that if fiscal problems in smaller nations can’t be solved, they will spill over to bigger countries amid an economic slowdown,” said Kengo Suzuki, manager of the foreign-bond department in Tokyo at Mizuho Securities Co. “With the possibility that risks to the global economy will increase because of Europe’s debt crisis, we have to be wary about a further drop in the Australian and New Zealand currencies.”

Australia’s dollar dropped to 77.97 yen as of 4:23 p.m. in Sydney from 78.29 yesterday in New York. The so-called Aussie sank to $1.0149, the lowest since Aug. 11, before trading at $1.0189 from $1.0222. New Zealand’s currency, nicknamed the kiwi, weakened 1 percent to 62.58 yen. It slid to 81.78 U.S. cents from 82.49 cents.

The rating for Italy, which has Europe’s second-largest debt load, was lowered to A from A+ with a negative outlook, S&P said in a statement dated yesterday. The rating company cited Italy’s “weakening economic growth prospects” as a reason for the downgrade.

Greek Debt Concern

Greek Prime Minister George Papandreou’s government will hold another call with its main creditors tonight after a “productive” round of talks aimed at staving off default. Finance Minister Evangelos Venizelos held “substantive” discussions with European Union and International Monetary Fund officials, the Athens-based finance ministry said in an e-mailed statement after a teleconference last night.

The country, whose one-year bills yield 126 percent, is struggling to convince critics that it will be able to win a sixth tranche of loans to prevent a default.

“The heightened fears of a Greek debt default and potential global financial crisis will keep the euro and Australian dollar under significant pressure,” John Kyriakopoulos, Sydney-based head of currency strategy at National Australia Bank Ltd., wrote in a research note today.

The Australian dollar has lost 2.6 percent this year, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

Global Risk Exposure

“The Australian dollar is far too exposed to growth in China and commodity prices,” Andrew Su, chief executive officer of Compass Global Markets in Sydney said in an interview with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” These in turn are exposed to the slowdown in global growth and the Aussie is likely to drop below parity with the U.S. currency within the next two weeks, Su said.

Australia’s currency rose as high as $1.0243 after the Reserve Bank of Australia released minutes of its most recent meeting saying the central bank is “well placed” under current policy settings.

RBA Governor Glenn Stevens has kept the overnight cash rate target at 4.75 percent this year as monthly employment growth averaged 2,800 from January through August, less than one 10th of the average of 30,500 job gains in the first eight months of 2010. The benchmark rate is higher than all of the nation’s government bond yields.

RBA Rates

“With the medium-term outlook for inflation still remaining intact, the minutes didn’t fan speculation for a rate cut that some people are expecting, which spurred buying of the Australian dollar,” said Takuya Kawabata, a researcher in Tokyo at Gaitame.com Research Institute Ltd., a unit of Japan’s largest foreign-exchange margin company.

Traders are betting that the RBA will lower its main rate by 144 basis points, or 1.44 percentage points, over the next 12 months, according to Credit Suisse AG indexes based on swaps. The Reserve Bank of New Zealand is predicted to raise its rate by 37 basis points over the same period, according to the indexes. The RBNZ cash rate is 2.5 percent.

The Australian and New Zealand dollars have scope to move lower “as interest rate differentials narrow and Australian economic activity responds to tighter monetary conditions,” Barclays Capital strategists Hamish Pepper, Olivier Desbarres and Nick Verdi wrote in a research note today.

--Editors: Benjamin Purvis, Rocky Swift

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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