The Australian dollar fell from its highest level since August 2008 on speculation the currency’s gains have come too rapidly and as futures signaled U.S. stocks may fall a third day, damping demand for higher-yielding assets. New Zealand’s currency also slid, after yesterday capping a seventh straight month of gains, as the MSCI Asia Pacific index slid for the second day this week. Citigroup Inc. yesterday recommended investors sell the Australian currency versus Canada’s as the Reserve Bank of Australia may “signal a cautious approach in removing stimulus” at its Oct. 6 meeting. “We’re not ready to break through 90 cents yet, so we’re bound to get some jitters and a bit of profit-taking,” said Darren Heathcote, head of trading at Investec Bank (Australia) Ltd. in Sydney. “Given the quantum of the moves we’ve seen recently, it’s quite easy to see us pushing back toward the 85.50-cent level if we get a larger fall on the U.S. stock market or negative data locally.” Australia’s currency fell 0.3 percent to 88.05 U.S. cents as of 3:15 p.m. in Sydney from 88.28 cents in New York yesterday. It earlier touched 88.59 cents, the strongest since August 2008. The currency rose 0.1 percent to 79.27 yen. New Zealand’s dollar fell 0.4 percent to 72.05 U.S. cents. It bought 64.84 yen from 64.87 yen. Both currencies climbed earlier against the dollar and yen amid signs the outlook for manufacturing in China, Australia and Japan is improving. ‘China-Led’ Recovery The Purchasing Managers’ Index for China increased to a seasonally adjusted 54.3 in September from 54.0 the previous month, the Federation of Logistics and Purchasing said today. An Australian Industry Group and PricewaterhouseCoopers survey today showed that a domestic manufacturing index rose to the highest level since December 2007 in September as companies boosted production, inventories and deliveries. Confidence among Japan’s largest manufacturers rose for a second straight quarter with the Tankan index of sentiment climbing to minus 33 from minus 48 in June and a record low of minus 58 in March, the Bank of Japan said today. A negative number means pessimists outnumber optimists. “The Aussie should benefit from a China-led Asian recovery and also monetary policy tightening expectations,” said Tomoko Fujii, senior currency strategist at Bank of America Securities- Merrill Lynch in a Bloomberg Television interview. “The kiwi is also likely to benefit from the global recovery and firmer commodity prices.” Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. Rate Increases Australia’s dollar climbed 25 percent this year as traders bet the RBA will raise its benchmark 1.90 percentage points over the next 12 months, according to a Credit Suisse Group AG index based on swaps. Futures markets show a more than 80 percent chance policy makers will increase rates as early as November. “A rate hike is probable in November or even October,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “There’s a weak U.S. dollar permeating through commodities and a sense that you want to be in emerging- market, high-growth and commodity-driven trades.” Buy Canadian Citigroup recommended yesterday that investors sell the Australian dollar and buy Canada’s as investor expectations are “unusually high for a hawkish surprise,” from the RBA in October, New York-based Todd Elmer and London-based Michael Hart, currency strategists at Citigroup Inc, said in a note to clients. Investors should target a decline in the Australian dollar to C$0.9150 and “reassess” the trade on an advance to C$0.96, the analysts said. The so-called Aussie traded at C$0.9434. The market is pricing in changes that “would mark the second-fastest pace of tightening since the RBA adopted its present inflation-targeting framework in the early 1990s,” the strategists wrote. Australian government bonds gained, ending two days of losses. The yield on 10-year notes fell nine basis points, or 0.09 percentage point, to 5.29 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 rose 0.655, or A$6.55 per A$1,000 face amount, to 99.684. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 4.28 percent from 4.31 percent yesterday. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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