Pacific Investment Management Co. predicts lower benchmark Australian interest rates as mining investment cools while a Janet Yellen-led Federal Reserve maintains stimulus that strengthens the Aussie.
The local dollar climbed the most among major currencies this month on prospects a partial U.S. government shutdown and Yellen’s promotion will push the Fed to delay a reduction in asset purchases. Pimco, which runs the world’s largest debt fund, said Australian bonds may gain as the economy slows with mining companies paring investment after a record boom.
“Should the Australian dollar remain persistently high, this will only impede the required rebalancing in our economy and support the need for further easing,” Robert Mead, a Sydney-based money manager for Pimco, said yesterday in an e-mailed response to questions. A Yellen confirmation “would support a Fed leadership that will maintain extraordinarily easy monetary policy for longer than the market expects.”
RBA Governor Glenn Stevens has said a weaker Aussie would help rebalance the economy as he seeks a transition from resource investment to employment-intensive businesses such as residential construction. Industries from tourism to steelmaking and education were hampered as the Aussie climbed 48 percent in the four years to Jan. 1. The economy is slowing as a decade-long boom that lifted mining investment to about 7 percent of gross domestic product wanes.
“Australia does not have the luxury of controlling the balance sheet for the mining sector,” Mead and colleague Adam Bowe wrote yesterday in an article on Pimco’s website. “The RBA will have to keep interest rates low for an extended period, in our view, and likely lower them further to help smooth the transition away from mining-assisted growth.”
Stevens and his board have cut the benchmark cash rate by 2.25 percentage points since late 2011 to a record-low 2.5 percent. In a statement accompanying the Oct. 1 decision when borrowing costs were left unchanged, he said “a lower level of the currency than seen at present would assist in rebalancing growth.”
As the Fed’s No. 2 official, Yellen has articulated the case for maintaining highly accommodative monetary policy. In a series of 2012 speeches, she outlined why rates could remain near zero into late 2015, and in a 2011 speech she justified the Fed’s first two rounds of large-scale asset purchases with an estimate that the programs would create 3 million jobs.
“She’s even more of a dove than Bernanke is,” said J. Alfred Broaddus, a former president of the Federal Reserve Bank of Richmond who debated Yellen over the Fed’s mandates during the 1990s.
Traders are betting on a 76 percent chance the RBA will hold rates for the rest of this year, according to swaps data compiled by Bloomberg. The unemployment rate fell to 5.6 percent last month from a four-year high of 5.8 percent in August, government data today showed.
Home prices in Australia’s biggest cities rose 3.7 percent in the three months through September, according to the RP Data-Rismark Home Value Index.
Sydney will lead a jump in home prices as demand driven by low rates meets a lack of supply, SQM Research Pty estimated. Prices across major cities may rise as much as 11 percent on average in 2014 in SQM’s base-case scenario, which assumes no more than one 25 basis-point RBA rate cut, it said.
A private report this week showed business confidence surged in September to the highest level in 3 1/2 years after the federal election ended a hung parliament.
Pimco remains “skeptical” the recent improvement in business sentiment signals stronger investment intentions by non-mining companies, Mead and Bowe wrote. The International Monetary Fund said in an Oct. 8 report that Australia’s unemployment rate will climb to a 10-year high in 2014 and reduced its growth forecast for an economy that has avoided recession for 22 years.
Mead said Australian government bonds due between three to five years are attractive, after yields climbed to the highest in at least six months. Newport Beach, California-based Pimco oversaw $1.97 trillion in assets worldwide as of June, according to the company’s website.
The yield on benchmark five-year Australian notes rose more than 40 basis points since June and touched 3.48 percent today, the highest since April 2012. Three-year yields reached 3.07 percent, the most since March.
The premium five-year Aussie debt offers over similar-dated U.S. notes widened 38 basis points this month to 204 basis points. Australian sovereign securities handed investors a 0.5 percent loss this year, compared with a 2.6 percent slide for Treasuries.
The Australian dollar has risen more than 6 percent since the start of September to 94.55 U.S. cents as of 11:50 a.m. in Sydney. It is the best performer this month among 16 major currencies tracked by Bloomberg.
“That’s clearly not what the RBA wants,” said Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia who predicts the central bank will cut rates next month. “The higher the currency goes the lower the cash rate will go as they try to offset that contractionary impact.”