High yielders losing luster?

While the Australian and New Zealand dollars still boast the highest overnight cash rates in the industrialized world at 5.50 percent and 6.75 percent, respectively, interest rate differentials are on the move and these so called high yielders may be losing some of their luster.

Since early July, the two currencies have posted modest gains vs. the U.S. dollar, but most strategists see limited upside potential for both the Aussie dollar and “kiwi” into the early fall.

“Aussie strength has mostly been the result of U.S. dollar weakness,” says Brian Dolan, director of research at Gain Capital.

Versus the U.S. dollar, the Aussie dollar has gone from a 2005 low of .7365 on July 7 to the .7750 area mid-August.

With the U.S. Federal Reserve recently hiking rates for a 10th straight time to bring the fed funds rate to 3.50 percent, analysts say the benefits of the carry trade in the high yielders will only continue to narrow between now and yearend.

That should put downside pressure on these currencies, and a slowing growth picture in New Zealand won’t help the kiwi, either.