Australian, New Zealand Dollars Gain on Yield Spread Over U.S.

By David McIntyre


Jan. 2 (Bloomberg) -- The Australian and New Zealand dollars gained as investors were attracted to the countries' higher-yielding government bonds.

The yield advantage of Australia's two-year bonds over equivalent U.S. Treasuries is at the widest in four years and New Zealand's equivalent spread is near the most since 1991. Australia's dollar has gained 4.4 percent and New Zealand's advanced 7.9 percent since Sept. 18, when the Federal Reserve started cutting the benchmark U.S. interest rate.

``Yield differentials are supporting the Aussie and kiwi,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney, referring to the currencies' by their nicknames. ``The U.S. is still at risk of rate cuts.''

The Australian dollar advanced to 87.59 U.S. cents at 9:47 a.m. in Sydney from 87.45 cents late in late Asia yesterday. The currency rose to 97.98 yen from 97.59 yen.

The New Zealand dollar gained to 76.79 U.S. cents from 76.40 late yesterday. It was at 85.95 yen compared with 85.33.

Trading volumes in the currencies will be below average this week as many investors are still on holiday for the New Year break, Morriss said. Financial markets in New Zealand are closed today for a public holiday.

Australia's government two-year bonds yield 3.80 percentage points more than equivalent Treasuries, the widest premium since November 2003. New Zealand two-year notes yield 4.31 points more than the U.S. equivalent, the most in almost two weeks. The spread reached 4.68 percentage points on Dec. 11, the widest since March 1991.

Central Bank Bets

Traders expect the Fed to cut rates by 1 percentage point in the next 12 months, according to an index calculated by Credit Suisse Group, based on trading in interest rate swaps. There is a quarter-point rate increase priced in for Australia, and New Zealand's cost of borrowing is likely to remain unchanged, according to similar indexes.

The Fed cut rates by 1 percentage point last year to 4.25 percent while the Reserve Bank of Australia raised the cost of borrowing by half a percentage point 6.75 percent. That helped Australia's dollar gain 11 percent last year. The Reserve Bank of New Zealand increased rates in four quarter-point moves in 2007 to 8.25 percent, driving the currency up 9.8 percent.

Australia's dollar is likely to rise to 90 cents by the end of March, according to the median estimate of 38 analysts and brokerages surveyed by Bloomberg News. New Zealand's dollar will probably finish the first quarter little changed at 76 cents, according to 35 analysts.

The yield on the Australian government two-year bond fell 1 basis point to 6.84 percent as the price for the 7.5 percent note due in September 2009 gained to 101.02 from 101.01. A basis point equals 0.01 percentage point.