Aussie Falls to Lowest Since ’11 on Stocks, Lower Yield Premiums

The Australian dollar fell to the lowest level since 2011 as the nation’s shrinking interest-rate advantage over its peers damps the allure of the currency.

Insight Investment Management Ltd., which oversees about $134 billion in fixed income and currencies, has been selling the Aussie as the yield spread between Australia’s sovereign debt and its global peers narrowed by almost half a percentage point since March. The Australian and New Zealand dollars slid against the yen for a third day as Asian stocks extended a global rout, sapping demand for riskier assets.

“The Aussie’s trend is clearly downward,” said Kengo Suzuki, the chief currency strategist at Mizuho Securities Co. in Tokyo, a unit of Japan’s third-biggest financial group by market value. “The Australian dollar remains susceptible to selling when markets are in a risk-off situation.”

Australia’s currency dropped 0.6 percent to 94.81 U.S. cents as of 5:11 p.m. in Sydney after touching 94.35, the weakest since Oct. 4, 2011. New Zealand’s kiwi dollar fell 0.2 percent to 79.53 U.S. cents after reaching 79.03, the lowest since July 26. The Aussie slid to 93.45 yen, a level unseen since Feb. 27, before trading at 94.18, 0.4 percent lower than yesterday. New Zealand’s currency was little changed at 78.99 yen.

The MSCI Asia Pacific Index of shares lost 1.2 percent, following a 1.4 percent drop in the Standard & Poor’s 500 Index.

Yield Gap

The extra yield that investors can get by holding Australia’s government bonds over their global peers was 1.6 percentage points yesterday, according to indexes compiled by Bank of America Merrill Lynch. That compares with an 11-month high of 2.07 percentage points on March 25.

The yield on Australia’s benchmark 10-year government note slid five basis points to 3.34 percent today.

“We are short the Aussie dollar,” Paul Lambert, the London-based head of currency at Insight Investment, said at a media briefing yesterday. “Australia has reached a new point in its path. Its interest rates are going to start to move toward the rest of the world.” Short positions refer to wagers that an asset price will fall.

Traders see the Reserve Bank of Australia lowering borrowing costs by 41 basis points in the next 12 months, a Credit Suisse Group AG index based on overnight-index swaps showed. The index indicated 36 basis points of cuts yesterday. A basis point is 0.01 percentage point.

Rate Expectations

Royal Bank of Canada expects two more 25 basis-point reductions to the key rate this year, compared with a previous forecast for no change.

“Further cuts look like the path of least resistance even with additional currency weakness,” Su-Lin Ong, RBC’s Sydney-based head of Australian economic and fixed-income strategy, wrote in an e-mailed note to clients.

RBA Governor Glenn Stevens and his board kept the overnight cash-rate target at a record low 2.75 percent at their June 4 meeting. “The inflation outlook, as currently assessed, may provide some scope for further easing, should that be required,” Stevens said.

“The RBA policy statement was a green light for A$ bears and they are using it to keep right on going,” Kit Juckes, a global strategist at Societe Generale SA in London, wrote in a research note today. “The move has only just begun and remains the best way of positioning for softer Chinese growth.”

Trade with China, Australia’s biggest trading partner, totaled A$10.6 billion ($10 billion) in April. Australia’s trade surplus shrank to A$28 million for the month, data showed today, short of the median economist estimate for A$180 million in a Bloomberg News survey. The surplus for March was revised to A$555 million from an initial reading of A$307 million.

Option Bets

Options traders increased their bearish bets on the Aussie to the most in 11 months as they expect bigger swings in the currency against the greenback. Premiums on three-month put options granting the right to sell the Aussie exceeded those to buy by 2.92 percentage points, the most since July 13 last year, according to data on so-called risk-reversal rates. Same-term implied volatility, based on call- and put-option premiums, climbed to 11.9 percent, the highest since June 28, 2012.

Australia’s dollar has fallen 7.2 percent in the past three months, making it the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

Analysts forecast that the Australian dollar may climb to 98 U.S. cents in the third quarter, according to the median of their estimates in a Bloomberg survey. In contrast, options traders see about a 45 percent chance that the currency will finish the three months ending Sept. 30 below 94 cents.

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