Aussie, Kiwi Rise to Records After Inflation, Business Confidence Reports

The Australian dollar surged to a record after a government report showed consumer prices rose more in the second quarter than economists had forecast, prompting traders to slash bets on an interest-rate cut.

New Zealand’s currency also climbed to the highest since it was freely floated in 1985 after a private survey showed business confidence improved in July. Both reports added to pressure for the nations’ central banks to tighten monetary policy, increasing demand for their assets among investors seeking a haven from the U.S.’s debt deadlock.

“The money market will take out most, but probably not all, of the rate cuts that it’s got priced in for the next 12 months,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s biggest lender. “Not just the Reserve Bank of Australia, but U.S. dollar weakness across the board will boost the Aussie.”

Australia’s currency advanced to as high as $1.1063, the strongest since it was floated in 1983, before trading at $1.1036 as of 1:15 p.m. in Sydney from $1.0956 in New York. The so-called Aussie climbed 0.6 percent to 85.89 yen. New Zealand’s dollar rose 0.4 percent to 87.38 U.S. cents after earlier reaching a record 87.65 cents. The currency gained 0.3 percent to 68 yen.

Australia’s consumer price index rose 0.9 percent from the previous three months, the Bureau of Statistics said today. That was more than the 0.7 percent median estimate in a Bloomberg News survey of 25 economists. Prices were 3.6 percent higher than a year earlier, compared with the median forecast of 3.4 percent.

Rate Bets

The report reflects lingering effects of floods in the nation’s northeast that shut mines and wiped out crops and were followed by a cyclone that tore through sugar- and banana- producing areas. RBA Governor Glenn Stevens, who has paused rate increases for the longest stretch since 2007, this week said the inflation data will help determine the path of monetary policy.

Swaps traders reduced bets on an interest-rate cut in Australia after the report, according to a Credit Suisse AG index. Stevens will reduce the benchmark 24 basis points over 12 months down from 39 yesterday, it shows.

New Zealand’s dollar advanced after a survey by ANZ National Bank Ltd. showed business confidence rose to a 14-month high in July amid record-low borrowing costs and higher commodity prices.

Business Confidence

A net 47.6 percent of companies expect the economy will improve over the next year, the highest level since May 2010, and up from 46.5 percent in June, the survey shows. A second measure of expectations for companies’ sales and earnings rose to 43.7 percent, compared with 38.7 percent in June.

“There is now more pressure on New Zealand’s Reserve Bank to tighten conditions than there was before the report,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp, Australia’s second-largest lender. “The report was kiwi positive and should push it to a new post-float high.”

Reserve Bank of New Zealand Governor Alan Bollard last month signaled expectations of a quarter-point rise in December were consistent with his estimates. A Credit Suisse index shows traders are wagering that rates will increase about 1 percentage point over 12 months.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose five basis points to 3.67 percent.

Australia’s three-year bond yield gained 12 basis points to 4.49 percent. Yields on the benchmark 10-year bond rose four basis points to 4.98 percent.
 
Benchmark interest rates are 4.75 percent in Australia and 2.5 percent in New Zealand, compared with as low as zero in the U.S. and Japan, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.(Bloomberg)