Australia, N.Z. Dollars Drop as Falling Stocks Damp Risk Demand

Dec. 30 -- Australia’s and New Zealand’s dollars fell, trimming their biggest annual advances in six years against the greenback, as declines in Asian stocks reduced demand for higher-yielding assets.

The Aussie currency snapped a five-day winning streak after the MSCI Asia Pacific Index of regional shares slumped for the first time this week. The Australian and New Zealand dollars were poised for record yearly advances against the yen as traders speculated that both nations’ central banks will raise interest rates next year.

“Markets will struggle for direction today amidst thin liquidity and low volumes,” said Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong. “Equity gyrations will dictate direction for currencies.”

Australia’s dollar fell 0.4 percent to 89.13 U.S. cents as of 2:50 p.m. in Sydney, from 89.49 cents yesterday in New York, when it climbed 0.9 percent for its largest advance since Dec. 1. The currency slid 0.2 percent to 82.15 yen. New Zealand’s dollar dropped 0.4 percent to 71.47 U.S. cents and declined 0.2 percent to 65.89 yen.

The MSCI Asia Pacific Index dropped 0.3 percent today. The Standard & Poor’s Index fell 0.1 percent yesterday.

Annual Gains

Australia’s dollar has advanced 27 percent this year versus the greenback and New Zealand’s is up 23 percent, the largest gains since 2003. The Aussie has climbed 29 percent against the yen and the so-called kiwi has risen 26 percent. Those increases lag behind only the Brazilian real and South Africa’s rand among the 16 most-traded currencies.

Benchmark interest rates are 3.75 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

“Central banks in Australia and New Zealand are likely to hike rates next year,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France’s third- largest bank. “The bias is for their currencies to be bought.”

Australia’s benchmark will rise to 4.75 percent by September and New Zealand’s will reach 3.75 percent, while the U.S. rate will increase to 0.5 percent and Japan’s will be unchanged, according to Bloomberg surveys.

Australia’s dollar may struggle to rise past 90 U.S. cents and will find buyers near 89.05 cents, said Alex Sinton, a senior dealer at ANZ National Bank Ltd. in Auckland. New Zealand’s currency may run into resistance at 72.15 cents and find support at 71.50 cents, he said.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates which is sensitive to interest-rate expectations, was at 4.62 percent, from 4.63 percent yesterday and 4.34 percent at the beginning of the month.

Australian government bonds rose. The yield on 10-year notes fell three basis points, or 0.03 percentage point, to 5.71 percent, according to data compiled by Bloomberg.