Aussie dlr headed for worst month ever, bills firm

Fri, Oct 31 2008, 06:07 GMT
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SYDNEY, Oct 31 (Reuters) - The Australian dollar lost ground on Friday, hurt by mounting worries about a sharp global economic downturn, putting it on track for its worst monthly performance since it was floated in 1983.

Also weighing down on the Aussie, which had gained to one-week highs in offshore trade, were expectations of a another steep interest rate cut by the Reserve Bank of Australia next week..

That would follow a 50 basis point cut by the U.S. Federal Reserve earlier this week and a 20 basis point cut by the Bank of Japan on Friday. The BoJ cut was the first in seven years. [nT265363]

"We had some month-end squaring of positions putting the Aussie under slight pressure on Friday," said Joshua Williamson, senior strategist at TD Securities.

"Next week we could see a bit more downward pressure on the Aussie if the central bank issues a dovish statement along with its rate decision."

By 4:15 p.m., the Aussie dipped to $0.6729 from $0.6832 late here on Thursday. It had advanced to a high of $0.6894 in offshore trade, jumping over 13 percent since it struck a 5- year low of $0.6007 earlier this week.

The Aussie has lost 15 percent this month as investors unwound carry trades and dumped commodity currencies on expectations that a global recession would hurt demand for natural resources. Australia is a big exporter of commodities.

"Cross-border equity flows are a proxy indicator for growth expectations," said Carlin Doyle, macro strategist at State Street Global Markets.

"Many of these indicators are at multi-year lows and suggest a period of below-average growth over the course of the next year," said Doyle, who expects the Aussie to fall further.

Against the yen, the Aussie fell to 66.26 yen from 67.24 yen <AUDJPY=R> late here on Thursday, when it posted its best three-day surge ever, gaining to a one-week high of 68.06 yen.

It lost 21 percent against the yen over October as investors rushed to the safety of lower-yielding currencies and government debt.

Australian bill futures rose as investors priced in 100 basis points of rate cuts by the central bank by year end. Investors expect the RBA to cut by 50 basis points at next Tuesday's policy meeting.

That would follow a stunning 100 basis point reduction in the cash rate earlier this month as the central bank stepped up its effort to cushion the economy from the turmoil in financial markets.

Australian bond futures were firmer, with the longer end outperforming, buoyed by safe-haven inflows. The three-year bond futures rose 0.02 points to 95.525, while the 10-year futures contract added 0.055 points to 94.82.

---------------(Snapshot at 4:15p.m./0515 GMT)-----------------

FUTURES CASH YIELD

90-DAY BILL<YBAc1> (DEC) 95.010(+0.030) 5.81 (5.90)

3-YR BOND (DEC) 95.525(+0.020) 4.47 (4.46)

10-YR BOND (DEC) 94.820(+0.055) 5.19 (5.22)

AUD/USD 0.6729 (0.6832) US 10-YR 3.94 (3.88)

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AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD

USD +271 (+270) +125 (+134) *FUTURES +0.705 (+0.745)

CAD +223 (+218) +150 (+147) *AUD 2-YR/10-YR SPREAD

NZD -149 (-146) -88 ( -83) *CASH +93 (+102)

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(Reporting by Anirban Nag; Editing by James Thornhill)

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