Wednesday, September 17, 2008

Australia and Newzealand experiences currency rebound

The Australian and New zealand dollars rallied against the U.S. and Japanese currencies after the U.S. government agreed to take over American International Group Inc. to save it from collapse.

The South Pacific currencies, favorites of so-called carry trades, rose as the government agreed to lend as much as $85 billion to the country's biggest insurer and Barclays Plc, the U.K.'s third-biggest bank, agreed to acquire the North American investment-banking unit of Lehman Brothers Holdings Inc.

With the AIG news this morning and the Barclays news make the International market,a better risk environment,which led to the recovery Aussie and kiwi currencies.

The Australian dollar rose 1.2 percent to 80.04 U.S. cents at 5:05 p.m. in Sydney from 79.08 cents late in Asia yesterday. It climbed 2.8 percent to 84.70 yen from 82.38 yen yesterday.

The New Zealand dollar gained 1.9 percent to 66.43 U.S. cents from 65.21 cents late in Asia yesterday. It bought 70.29 yen from 67.91.

The currencies rose amid reports that the AIG agreement will avert a failure that could have threatened more financial companies and added to chaos in world markets.

The New Zealand dollar yesterday dropped to the weakest in more than four years against the yen and Australia's slid to a 2 1/2-year low as a global stocks rout curbed demand for the nations' higher-yielding assets.

The New Zealand dollar rebounded off its lows in line with the recovery in U.S. equity markets amid hopes that government authorities will take action to prevent a systemic failure of the banking system.

The Australian currency has fallen 19 percent against the dollar since reaching a 25-year high on July 16 and 17 percent versus the yen.

Global growth expectations are being revised down a bit and so are expectations for many commodity prices, and our currency is usually affected by changes in sentiment there'.

Interest rates are 7 percent in Australia and 7.5 percent in New Zealand, making them favorites with investors seeking higher returns.

Still the Bond market seems to be failing in Both Australia and NewZealand.

In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves can erase those profits.

Australian government bonds fell. The yield on the 10-year note rose 12 basis points, or 0.12 percentage point, to 5.57 percent. The price of the 5.25 percent security maturing in March 2019 fell 0.942, or A$9.42 per A$1,000 face amount, to 97.485. Bond yields move inversely to prices.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, rose to 6.89 percent, from 6.8 percent yesterday.

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