By Candice Zachariahs Nov. 4 (Bloomberg) -- The Australian and New Zealand dollars were little changed before the Federal Reserve releases its statement about interest rates on speculation the South Pacific nations’ will retain their yield advantage over the U.S. Demand for New Zealand’s currency was bolstered as Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said milk powder prices rose 11 percent to a 15-month high at auction yesterday. Australia’s dollar, the world’s best performing currency over the past year, earlier fell as retail sales unexpectedly declined, raising concern its central bank will temper the pace of interest-rate increases. “With the Fed likely to stick to its ‘extended period’ language in the U.S., it probably means that Australian rates can be as high as 4 percent before we see any sign of the first move from the Fed,” said Simon Grose-Hodge, a Singapore-based strategist at LGT Group, the bank owned by Liechtenstein’s royal family, in a Bloomberg Television interview. “We’re still bullish and we do see it by the middle of next year testing that parity level,” he said of the so-called Aussie. Australia’s currency traded at 90.25 U.S. cents as of 4:16 p.m. in Sydney from 90.24 cents in New York yesterday. It bought 81.46 yen from 81.52 yen. New Zealand’s dollar fetched 72.02 U.S. cents and slipped 0.1 percent to 65 yen. The Aussie earlier fell by as much as 0.6 percent after the bureau of statistics said the country’s retail sales declined 0.2 percent in September from the previous month. The median estimate of 22 economists in a Bloomberg survey was for a 0.5 percent gain. Benchmark interest rates are 3.5 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. Yield Premium Governor Glenn Stevens said yesterday it was “prudent to lessen gradually” the stimulus provided by low borrowing costs, in the statement accompanying his decision to raise interest rates by 25 basis points for the second time in a month. Fed policy makers repeated Sept. 23 that rates will stay low for an “extended period.” The bank will hold the benchmark rate target in a range between zero and 0.25 percent, according to all 96 economists in a Bloomberg News survey. “We expect the Fed to keep that key phrase in when referring to interest rates -- keeping them low for an extended period of time,” said David Forrester, a currency economist with Barclays Capital in Singapore. “The RBA will get the policy rate to 5.5 percent by the end of 2010. It’s just going to be more gradual going forward.” Auckland-based Fonterra said whole milk powder for January delivery rose 11 percent to $3,352 a metric ton, the fourth- straight monthly increase. Product for delivery in mid-2010 jumped 21 percent. Deficit, Bonds New Zealand Finance Minister Bill English said the nation’s jobless rate will likely peak at about 7 percent some time in 2010, less than the 8 percent the government previously expected. A report tomorrow will show the rate was 6.4 percent in the third quarter, according to economists in a Bloomberg survey. “We remain of the view that higher cash rates are on the agenda from first quarter 2010, with the first tightening as soon as January after the RBNZ upgrades growth and inflation forecasts in December,” Annette Beacher, a senior strategist at TD Securities in Singapore, wrote in a note to clients today. The bank expects the New Zealand dollar to end 2009 at 72 U.S. cents before climbing to 77 cents by the middle of 2010. New Zealand’s cash budget deficit was NZ$3.29 billion ($2.4 billion) in the three months ended Sept. 30, or NZ$318 million narrower than forecast on delays in spending, the Treasury Department said in a statement today. Australian government bonds fell. The yield on 10-year notes added six basis points, or 0.06 percentage point, to 5.55 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 0.407, or A$4.07 per A$1,000 face amount, to 97.848. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 4.47 percent. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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