KEY POINTS:
Australia's dollar fell from an almost three-month high and New Zealand's currency dropped from the strongest level in six months yesterday as traders cut holdings of higher-yielding assets on further signs the US economy is weakening.
The currencies declined by the most in two weeks against the yen as investors reduced so-called carry trades after a report showed US service industries unexpectedly contracted in January at the fastest pace since 2001.
Asian equities followed US stocks lower after the Standard & Poor's 500 Index tumbled the most in 11 months.
"It's very much a tug of war between the yield and risk aversion stories," said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. "While that plays out we've probably seen the recent highs capping the Aussie and kiwi."
The Aussie may decline to 88.70 cents and the kiwi to 77.40 cents over the next day or or so, Trinh said.
The yield advantage on Australian two-year government bonds over similar-maturity Japanese debt was 6.05 percentage points, near the 6.18 points reached on December 28 that was the widest since February 2000. New Zealand's equivalent yield premium is 6.69 points, compared with 6.85 points on December 11, the most since August.
"I'd be hesitant to put a bottom on the Aussie and kiwi because it's all in the hands of risk aversion," said John Rothfield, senior currency strategist at Bank of America in San Francisco. "This is based on concerns about risk appetite."
The Australian dollar fell 0.9 per cent to US89.59c from US90.44c late in Asia on Tuesday, when it reached US91.01c, the highest since November 9. Against the yen, the currency declined 2 per cent to 95.38.
The New Zealand dollar dropped 0.9 per cent to US78.16c cents from US78.87c late Tuesday, when it touched 79.69c, the strongest since July 26.
Rothfield said there were support levels for the Aussie at US88.10c and US76.80c for New Zealand's currency. Those levels are equivalent to the mid-way point of 2008 highs and lows in the currencies, according to the Fibonacci series used by technical analysts. A break of one level indicates a currency may move to the next while a failure suggests a trend may stall. Support is where pre-set orders to buy may be clustered.
Australia's dollar has declined 10 per cent and New Zealand's lost 6.3 per cent in the past three months against the yen. The currencies are favourites for carry trades, in which investors buy higher-yielding assets with money borrowed in countries with low borrowing costs such as Japan's 0.5 per cent.
Australia's benchmark rate was increased to 7 per cent yesterday and New Zealand's rate is 8.25 per cent. The strategy is considered risky because currency fluctuations can erase profits between the two rates.
- BLOOMBERG