Australian, New Zealand Dollars Maintain Two-Day Rally as Stocks Advance

By Candice Zachariahs and Mariko Ishikawa - Oct 6, 2011 3:07 PM GMT+0800

The Australian and New Zealand dollars held a two-day gain versus the U.S. currency as Asian stocks extended a worldwide rally, increasing demand for higher- yielding assets.

Both South Pacific currencies were supported after German Chancellor Angela Merkel said yesterday she’s ready to discuss possible recapitalization of European banks at a European summit this month. The International Monetary Fund renewed its call for theEuropean Central Bank to step up its response to the region’s debt crisis if it continues to threaten growth and destabilize financial markets.

“The crazy jigsaw that is the European debt debacle is starting to see a plan bubbling around in the background and that should be positive for risk,” said Chris Weston, an institutional dealer at IG Markets in Melbourne. “Hopefully we’ll see some further measures from the ECB and that should be good for the euro and also help the Aussie push upward.”

Australia’s dollar traded at 96.78 U.S. cents at 5:49 p.m. in Sydney from 96.59 in New Yorkyesterday, when it rose 0.9 percent. The currency fetched 74.26 yen from 74.17. New Zealand’s dollar bought 76.68 U.S. cents after advancing 0.8 percent to 76.62 yesterday. It was little changed at 58.84 yen.

The MSCI Asia Pacific Index of stocks rose 2.8 percent, snapping four days of declines. The Standard & Poor’s 500 Index climbed 1.8 percent yesterday while the Thomson Reuters/ Jefferies CRB Index of raw materials advanced 1.9 percent.

European Banks

The German chancellor said she supports recapitalizing European banks “if there is a joint assessment that the banks aren’t adequately capitalized” and finance officials develop “uniform criteria.”

The IMF said in its biannual regional economic outlook for Europe that a “significant number” of euro-region banks should be strengthened as they lack sufficient capital buffers.

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.

The Aussie has dropped 3.3 percent in the past month, the second-worst performer among 10 developed nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. New Zealand’s currency has fallen 2.1 percent.

U.S. Jobs

“The market was oversold so we’ve seen a rally in the Aussie and kiwi with lots of exporters coming in at the lows,” said Tim Kelleher, Auckland-based head of institutional foreign- exchange sales at ASB Institutional, a unit of Commonwealth Bank of Australia. “We’d be sellers on rallies expecting more equity weakness later in the week.”

The MSCI World (MXWO) Index of stocks has dropped 9.1 percent since Aug. 31 amid concerns that U.S. economic growth will slow and Europe’s debt crisis will worsen.

Gains in the Australian and New Zealand dollars were limited before the U.S. Labor Department releases its employment report tomorrow.

U.S. employment climbed by 59,000 workers in September and the jobless rate was unchanged at 9.1 percent, according to the median forecast of economists surveyed by Bloomberg News. Employment was unchanged in August, the report showed last month, compared with the median forecast for a 68,000 gain.

“We will see a cap on gains in riskier assets like the Australian dollar heading into the U.S. payrolls number,” said Tim Waterer, a foreign-exchange dealer at CMC Markets in Sydney. “The last payroll number disappointed and that brings back into focus the weakness in the U.S. economy.”

Australia’s 10-year bond yield increased 10 basis points, or 0.1 percentage point, to 4.17 percent, rising for a second day. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates which is sensitive to interest-rate expectations, gained two basis points to 3.05 percent.

To contact the reporter on this story: Candice Zachariahs in Sydney atczachariahs2@bloomberg.net

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