BlackRock Inc., the world’s biggest fund manager, said Australia’s dollar may drop as low as 80 U.S. cents in the coming nine months after bets against the currency helped give one of its bond funds the nation’s best returns.
The strategy profited as the Reserve Bank of Australia cut rates while U.S. yields rose, said Stephen Miller, a managing director in Sydney at BlackRock, which oversees $3.9 trillion globally. Its Australian bond fund returned 3.4 percent in the first half, beating 80 fixed-income funds Morningstar Inc. tracks. The Aussie’s 11 percent drop this year may spur the RBA to keep borrowing costs unchanged next month, Miller said.
“We prefer to be sellers of the Aussie dollar still,” he said yesterday in an interview. “Let’s say that China’s a soft landing, let’s say the U.S. recovers in a manner that I expect, I would have thought that you’re probably looking at 80 cents at some stage in the next six to nine months.”
The extra yield Aussie 10-year notes offer over Treasuries shrank 34 basis points this year as a slowdown in Chinese growth weighs on Australia’s prospects, while Federal Reserve policy makers say the U.S. economy is strengthening. BlackRock’s Aussie forecast is more bearish than the median of 49 estimates compiled by Bloomberg for the currency to trade at 89 cents by March 2014. Its rate call contrasts with swaps markets pricing a 62 percent chance for an Aug. 6 cut to 2.5 percent.
“In China, growth is softening, and I think Australia has some particular challenges, but the good news is that the U.S. is recovering,” said Miller, who heads a six-person team in Sydney. “We’re going to see the biggest economy in the world not only doing better but probably doing better in a much more sustainable way. That’s the big development.”
The world’s fifth most-traded currency slid 0.4 percent to 92.58 U.S. cents as of 12:30 p.m. in Sydney, after a private report showed China’s manufacturing weakened further this month. The preliminary reading of 47.7 for a Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics compares with the 48.2 median estimate in a Bloomberg News survey of economists and 48.2 in June. Readings below 50 indicate contraction.
Miller said he currently has a small bet that would benefit from declines in the Aussie and he is looking to add to it if data confirm his bias.
The Aussie fell versus all but one of 16 major currencies since Fed Chairman Ben S. Bernanke suggested May 22 that policy makers may taper the amount of money they pump into the economy. It plunged 2 percent against the dollar on June 19, the day he said bond buying could end altogether by mid-2014.
Futures traders increased bets that the Aussie will decline against the U.S. dollar to a record on July 16, figures from the Washington-based Commodity Futures Trading Commission show.
The divergent outlook for monetary policy in Australia and the U.S. led to a steepening of the South Pacific nation’s yield curve, a move that BlackRock bet on in the first half.
Australia’s 10-year benchmark yields have risen since Dec. 31 along with a gain in longer-maturity U.S. yields, while RBA easing led to declines in those on shorter-maturity bonds. The rate on 10-year government bonds climbed to 3.70 percent today from 3.27 percent on Dec. 31. Three-year yields have fallen three basis points to 2.64 percent over the same period.
The spread between Australian and U.S. 10-year benchmark rates has narrowed to 117 basis points from 152 basis points at the end of 2012.
“We thought Aussie bonds would outperform other developed-market bonds and we were most convinced in the front part of the curve,” Miller said.
Australia’s sovereign bonds gained 0.5 percent this year, the only nation with a AAA grade from all three main ratings companies to deliver positive returns, according to Bank of America Merrill Lynch data. U.S. Treasuries dropped 2.4 percent. State debt in Australia, which BlackRock is betting on, rose 1.5 percent while corporate bonds climbed 2.6 percent, according to the Merrill indexes.
Miller said he is now adding to an overweight position in corporate debt, having pared it tactically in May and June.
Policy makers will probably cut the cash target by a quarter point again later this year, with a second cut some time in the next nine months, Miller said. The RBA may pause next month, keeping rates unchanged at 2.75 percent, Miller said, estimating that a 10 percent to 15 percent drop in the Aussie is equivalent to about a 50 basis point reduction in benchmark borrowing costs.
Traders pared bets the key rate will fall in August after government data today showed second-quarter underlying inflation accelerated. Wagers on a reduction fell to 64 percent from 73 percent yesterday, according to swaps data compiled by Bloomberg.
The consumer price index gained 2.4 percent in the second quarter from a year earlier, from a 2.5 percent pace in the previous three months, the Bureau of Statistics said today. The trimmed mean gauge rose an annual 2.2 percent, compared with the 2.1 percent median forecast in a Bloomberg News survey of economists. The weighted median rose 2.6 percent from a year ago, compared with estimates for a 2.4 percent climb.
The RBA has cut its rate by 2 percentage points since November 2011 as the cresting of a mining investment boom and the prospect of weaker commodities demand from China mean other parts of the economy need to expand more to fill the gap.
“The economy’s still growing a bit below trend,” Miller said. “We know that the RBA and the authorities more broadly are hopeful that non-mining sectors of the economy can recover. That remains more of a hope than something you could hang you hat on.”