Australia is forecast to be among the three fastest-growing economies in the developed world this year, making it harder for the central bank to convince currency investors it isn’t about to raise interest rates.
The Reserve Bank of Australia must differentiate itself from its counterparts in New Zealand and the U.K., which have signaled their economies may need higher borrowing costs, according to Westpac Banking Corp. Australia’s record-low benchmark rate hasn’t stopped foreign-exchange markets driving its dollar up 1.8 percent in the past month, the best performing Group-of-10 currency ahead of the kiwi and the pound.
While growth in Australia has been bolstered for now by a rebound in commodity-export volumes, the central bank is more focused on boosting labor-intensive industries from housing to manufacturing as mining investment cools. Gross domestic product will expand 3.1 percent in 2014, according to economists surveyed by Bloomberg News from June 12 to June 17, up from a previous forecast for 2.8 percent. New Zealand is predicted to grow 3.2 percent and the U.K. 3 percent.
“There’s a huge amount of investment that’s going to fall away in the second half of this year, something that the U.K. and New Zealand don’t really share with Australia,” said Michael Turner, a debt and currency strategist at Royal Bank of Canada in Sydney. “If they want to be credible on any kind of jawboning on the currency, they’re going to have to shift back toward an easing bias,” he said, referring to the RBA.
Economists increased their GDP forecasts this month following a June 4 report that showed a first-quarter expansion of 1.1 percent, the fastest pace in two years. Exports surged 4.8 percent from the previous three months, to be the biggest contributor to growth, the data showed.
Economists increased their forecasts for exports, while cutting projections for household consumption, according to this month’s Bloomberg survey.
“If domestic demand slows and exports pick up, headline GDP looks the same but the demand for labor is probably weaker than it was and that’s the more important part for policy,” RBC’s Turner said. RBA minutes released last week “probably opened risks up a little more” of the central bank moving to an easing bias, he said.
It’s hard to gauge how much low interest rates will offset a decline in mining investment and tighter fiscal policy, RBA officials said at their June 3 meeting, according to the minutes released June 17. Policy makers judged the currency was providing less assistance to rebalancing growth and was high by historical standards, particularly given recent declines in commodity prices, the minutes showed.
The Australian dollar tumbled 0.7 percent on the day the minutes were published and traders have been pricing in a greater probability the central bank will ease policy in coming months. There was a 20 percent chance of a rate cut by year-end on June 20, up from 9 percent odds a week earlier, according to swaps data compiled by Bloomberg.
Benchmark 10-year Australian bond yields fell 11 basis points last week, the most this month, to 3.68 percent.
In contrast, minutes of the Bank of England’s June 4-5 meeting showed policy makers said a rate increase this year may be more likely than investors anticipate as the economy gathers momentum. The Reserve Bank of New Zealand increased borrowing costs on June 12 for a third time this year and signaled further increases.
“You don’t want to get swept up with the kiwi and the sterling -- currencies that at the moment are at the top of the list in terms of the carry trade,” said Robert Rennie, head of currency and commodity strategy at Westpac in Sydney. He was referring to a strategy where investors try to exploit differences in global borrowing costs.
In such transactions, investors borrow in low-yielding nations and invest in those with higher returns.
The Aussie traded at 94.05 U.S. cents as of 5 p.m. in Sydney last week, having advanced 5.5 percent this year. A trade-weighted index for the currency was at 72.1 on June 20, near a seven-month high of 72.2 set on June 16.
The currency has remained resilient even as prices of Australia’s main commodity exports drop, with iron ore near its lowest since September 2012. Prices have fallen more than 10 percent for thermal coal and coking coal.
An almost 8 percent decline in the Aussie trade-weighted index would be consistent with the current price for iron ore, Deutsche Bank AG said in a research note published June 19. Though other factors are currently holding the currency up, the Frankfurt-based bank said.
“What we saw in the minutes was the beginning of a debate within the RBA to talk to the uncertainties -- which is their word -- of how much low rates were working to support domestic demand,” Westpac’s Rennie said. “We are going to see further concerns of that expressed in the July 1 policy statement.”
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