The Australian dollar, trading at a premium to its U.S. counterpart on average over the past 16 months, may weaken to 95 U.S. cents by year-end should the central bank cut interest rates today in response to cooling inflation, according to Westpac Banking Corp.
The CHART OF THE DAY shows the so-called Aussie weakened in the lead up to the last benchmark rate reduction in September 2008 and dropped to a five-year low of 60.09 U.S. cents within two months of that decision by the Reserve Bank of Australia. The lower panel tracks the yield premium Australian three-year government debt offers over similar U.S. Treasuries. The Aussie has averaged $1.0002 since June 21, 2010, Bloomberg data show. The RBA’s target rate is the highest borrowing benchmark in the developed world.
“The potential impetus for an RBA rate cut is definitely there,” said Jonathan Cavenagh, Singapore-based senior currency strategist at Westpac. “If that does unfold, we expect it to present a bearish backdrop for the Aussie dollar.”
The currency slid by an average of 3.4 percent in the month after rate cuts in 1996, 1998, 2001 and September 2008, according to Westpac. The Sydney-based bank forecasts the Aussie will tumble to 95 U.S. cents by year-end. It reached $1.1081 per U.S. dollar on July 27, the strongest since a currency peg was removed in 1983, after data showing second-quarter inflation had quickened prompted speculation the RBA would raise borrowing costs. The currency was at $1.0525 as of 5 p.m. yesterday in Sydney.
Futures traders saw an 80 percent chance of a 25 basis- point reduction in the central bank’s target rate, as of yesterday. That would be the first cut in 31 months. Average underlying inflation slowed in the three months to Sept. 30 to 0.3 percent, the least since the third quarter of 1997, a government report showed Oct. 26.
“We still see risks that the Aussie’s move above parity as not being sustained toward the end of this year and into 2012,” Cavenagh said in an interview last week.
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