Aussie dlr on defensive as world outlook darkens

Thu, Oct 23 2008, 06:15 GMT
http://www.afxnews.com

SYDNEY, Oct 23 (Reuters) - The Australian dollar came under renewed pressure on Thursday as risk-shy investors and hedge funds bailed out of leveraged trades in everything from equities to commodities and emerging markets.

The Aussie dollar eased to $0.6643, from $0.6675 late in New York on Wednesday, having dropped as low as $0.6598 at one point. Traders said markets were extremely thin and volatile with no-one brave enough to buy.

Bonds and bill futures jumped as investors wagered the resulting destruction of asset wealth and growing risks of a deep global recession would force the Reserve Bank of Australia (RBA) to cut rates by at least 50 basis points next month.

"We continue to favour 50 basis points, not least because we think the RBA is fairly determined to get the cash rate to a neutral setting sooner rather than later," said Sally Auld, a strategist at JPMorgan.

Neutral is a rate that neither drags on nor stimulates the economy, and Auld sees it at around 5.25 percent.

Deleveraging by households and financial institutions would take considerable time, she added, meaning a long period of sub-trend growth in a number of Western economies.

"This should keep bond markets well supported and highlights that risky asset classes may be subject to further bouts of weakness," said Auld.

The Japanese yen was again the major gainer as Japanese investors repatriated funds to cover losses at home. The Nikkei share index fell over 3 percent, while the Australian market shed 4.4 percent (For more on the global financial squeeze, see).

The Aussie slipped to 64.69 yen, from 65.12 in New York, but having already lost 40 yen in three months, traders suspected there are few long Aussie positions left to liquidate.

The Aussie fared a little better against the euro and sterling, which had recession worries of their own.

It also gained on the New Zealand dollar after the Reserve Bank of New Zealand cut rates by 100 basis points to 6.5 percent, its largest easing ever.

Massive unwinding of leveraged trades and the risk of recession hammered commodity prices. The CRB index shed 4.5 percent, while copper was down 7 percent and nickel off 9 percent. Gold hit a one-year low.

Fears of trouble in emerging markets were fuelled by huge falls in Argentine stocks after the government there moved to nationalise private pensions. Hungary had to raise rates by 300 basis points to protect its currency as panic spread to Eastern Europe.

Luckily for the Australian economy, the RBA still has plenty of scope to ease policy and bill futures are implying rates could fall by another 100 basis points by Christmas.

Three-year Australian bond futures rose 0.090 points to 95.610, while the 10-year bond contract rose 0.030 points to 94.885 as the yield curve steepened.

----------------(Snapshot at 4:10p.m./0510MT)------------------

FUTURES CASH YIELD

90-DAY BILL<YBAc1> (DEC) 95.140(+0.080) 5.86 (5.85)

3-YR BOND (DEC) 95.610(+0.090) 4.38 (4.45)

10-YR BOND (DEC) 94.885(+0.030) 5.11 (5.15)

AUD/USD 0.6643 (0.6674) US 10-YR 3.60 (3.71)

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

USD +261 (+258) +150 (+144) *FUTURES +0.720 (+0.670)

CAD +205 (+200) +152 (+146) *AUD 2-YR/10-YR SPREAD

NZD -123 (-148) -82 ( -81) *CASH +95 ( +99)

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(Reporting by Wayne Cole; Editing by James Thornhill)

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