Australia’s dollar rose against all its major peers as the central bank cut borrowing costs to a record low and said it would adjust policy to foster growth and keep inflation contained.
Australian government bonds slid after the Reserve Bank said the inflation outlook had allowed it to lower the overnight cash rate by a quarter percentage point to 2.5 percent, while damping expectations for further reductions. New Zealand’s dollar gained against most major peers after the nation’s government said the economy will avoid any immediate harm from the suspension of sales of some dairy products to China.
“They haven’t said that they have more room to cut rates,” said David Forrester, a Singapore-based senior vice president for Group of 10 currency strategy at Macquarie Bank Ltd. “It’s considered more of a neutral bias than an easing bias. I think we’ll see a squeeze” higher in the Aussie.
Australia’s dollar rose 0.6 percent to 89.79 U.S. cents as of 5:16 p.m. in Sydney from yesterday, when it touched 88.48, the least since August 2010. It gained 0.7 percent to 88.40 yen.
The yield on the benchmark 10-year government note rose 12 basis points, or 0.12 percentage point, to 3.71 percent.
RBA Governor Glenn Stevens said in a statement that the board “will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.”
“It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy,” the statement also said.
The Australian dollar sank 11 percent in 2013 through yesterday, the sharpest drop among 10 developed market currencies tracked by Bloomberg Correlation Weighted Indexes.
“The RBA has made very clear that the move we’ve had in the currency to date doesn’t have a significant impact in terms of their medium-term inflation outlook,” said Ray Attrill, the Sydney-based global co-head of currency strategy at National Australia Bank Ltd. “As far as they’re concerned, it’s ‘bring it on’ with respect to a still-weaker Aussie dollar.”
The reduction was the second this year, and extends an easing cycle that began in November 2011, when the benchmark rate was lowered from 4.75 percent. Today’s decision was predicted by 26 of 27 economists surveyed by Bloomberg News, with the sole dissenter forecasting no change.
Stevens is trying to stimulate growth in manufacturing, construction and retail as a record mining-investment boom wanes and the economic outlook remains clouded in China, Australia’s biggest trading partner.
Australia’s trade surplus was A$602 million ($541 million) in June, from a downwardly revised A$507 million the month before, the Bureau of Statistics said today. The median economist estimate was for a A$804 million surplus. The value of iron ore exports fell to A$5.4 million from A$5.8 million.
The economy’s adjustment away from mining-led growth has been hampered by a record period of strength for the Aussie dollar, which traded above $1 for a 10-month stretch that ended in May. The currency will buy 90 U.S. cents by Dec. 31, according to the median of estimates compiled by Bloomberg.
Australia’s real exchange rate is overvalued by between 5 percent to 15 percent despite recent declines, according to an International Monetary Fund report dated June 20 and released this month. The Aussie closed trading at 91.97 cents on June 20.
The RBA’s trade-weighted index, which tracks the nation’s currency against peers from 21 trading partners, dropped 11 percent this year through Aug. 2. It reached as high as 80.2 on April 12, the most since 1985.
Traders held record positions betting on declines in the Aussie versus the U.S. dollar last week, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on a drop compared with those on a gain -- so-called net shorts -- was 72,573 on July 30, compared with shorts of 63,982 a week earlier.
New Zealand’s currency rebounded versus the greenback after the nation’s government said it expects the economy will avoid any immediate harm from suspension of sales of some dairy products to China after the identification of a bacterial contamination that could cause botulism.
“The immediate damage economically to New Zealand is extremely limited,” Trade Minister Tim Groser told Bloomberg Television’s Rishaad Salamat in an interview today.
China imposed a ban on imports of whey powder and another ingredient made from whey protein concentrate, after Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said on Aug. 3 it had found contamination in a batch of the concentrate.
“While reputational issues will linger, if the issue doesn’t re-escalate, markets will quickly move on,” David Croy, a Wellington-based researcher at ANZ National Bank Ltd., wrote in research today. “With anecdotes and leading indicators all generally positive, and carry still attractive, NZD looks set to hold the bid.”
New Zealand’s dollar rose 0.5 percent to 78.60 U.S. cents, and gained 0.7 percent to 77.41 yen.