Australia’s government bonds rose, sending three-year yields to an 11-week low, as investors added to bets the central bank will cut interest rates.
The Reserve Bank of Australia reiterated in the minutes released today of its meeting this month that the inflation outlook gives it room to cut borrowing costs and that the Australian dollar “remained high.” The Australian dollar’s one-month implied volatility against the greenback rose to the most in seven weeks as investors weighed how the country will cope with a slowing global economy.
“There will be some consolidation in the Aussie after a big move yesterday, but risk appetite has been severely hurt from the combination of weaker Chinese and U.S data,” said Derek Mumford, a director at Rochford Capital, a currency risk-management company in Sydney. “The short end of the curve has been very volatile over the past couple of months. Interest-rate expectation in Australia has turned.”
Australia’s government bonds rose, pushing the three-year yields down by as much as six basis points, or 0.06 percentage point to 2.681 percent, a level unseen since Jan. 24. Two-year rates touched 2.673 percent, the lowest since March 5. Ten-year yields dropped to 3.182 percent, the least since Dec. 12.
The Aussie advanced 0.6 percent to $1.0379 as of 4:24 p.m. in Sydney from yesterday, when it lost 1.9 percent, the biggest drop since November 2011. The currency pair’s one-month implied volatility touched 8.32 percent, the highest since Feb. 28. The Australian dollar gained 1.4 percent to 101.27 yen from yesterday, when it weakened 3.4 percent.
The New Zealand dollar, known as the kiwi, rallied 0.9 percent to 84.84 U.S. cents from yesterday, when it fell 2.1 percent, the biggest decline since November 2011. It climbed 1.8 percent to 82.80 yen.
“Interest-sensitive parts of the economy were responding to the historically low levels of lending rates and it remained likely that this had further to run,” the minutes of the RBA’s April 2 meeting showed. “At the same time, the factors weighing on the economy -- including the high exchange rate, the waning growth of mining investment, and fiscal consolidation -- were likely to persist.”
The RBA held the cash target rate at 3 percent this month after reducing borrowing costs in six steps for a total of 1.75 percentage points in the 14 months through December.
Interest-rate swaps data compiled by Bloomberg show traders see a 33 percent chance the central bank will lower the benchmark to a record 2.75 percent on May 7, up from a 17 percent chance indicted a week ago.
“The capital inflow to the resource sector to fund investment, along with the increased purchases of government debt, have been putting upward pressure on the currency,” RBA Assistant Governor Guy Debelle said in Canberra today. “At the same time, the reduction in offshore borrowing by the banking system has been putting downward pressure on it.”
In New Zealand, Finance Minister Bill English said the local currency is overvalued. Many export companies face challenges if the New Zealand dollar stays at 86 cents, English said in response to questions in parliament today.
The kiwi touched 86.76 cents last week, the highest since August 2011 when it had reached a post-float high of 88.43. New Zealand paid out its biggest ever government bond maturity totaling NZ$11.3 billion ($9.6 billion) yesterday. Yields on 10-year New Zealand bond touched 3.27 percent today, the lowest since July 27.
The so-called Aussie and Kiwi posted the biggest drops in 17 months yesterday after data showed economic growth in China slowed and manufacturing in New York region expanded less than analysts estimated.
China’s gross domestic product expanded 7.7 percent in the three months ended March 31 from a year earlier, the Bureau of Statistics said in Beijing yesterday. The figure was less than the 8 percent median estimate in a Bloomberg News survey and 7.9 percent growth in the fourth quarter.
In the U.S., the Federal Reserve Bank of New York’s general economic index dropped to 3.1 this month from 9.2 in March. The median projection of 47 economists surveyed by Bloomberg was 7.