RBA Cuts Ended for Aberdeen Doubting BlackRock: Australia Credit

RBA Cuts Ended for Aberdeen Doubting BlackRock
The Reserve Bank of Australia (RBA) has lowered its cash target by 2.25 percentage points since it embarked on its current rate-cutting cycle in November 2011, including a 25 basis point reduction this month. Photographer: Dan Himbrechts/Bloomberg

Aberdeen Asset Management says investors are too pessimistic about Australia’s economy and the central bank may be finished cutting interest rates.

Victor Rodriguez, the fund manager’s head of fixed income in Sydney, predicts the Reserve Bank of Australia cash target will remain at a record-low 2.5 percent and the three-year government bond yield will rise half a percentage point over the next 12 months. The gap between Australian and U.S. three-year yields reached a 14-month low last week.

Aberdeen is betting that swaps traders are misguided in pricing a 61 percent chance the RBA will reduce rates again this year, according to Bloomberg-compiled data. BlackRock Inc., the world’s biggest money manager, said last week it expected the Australian dollar to drop further and that rates may be cut in November.

“It’s not as bad as some people believe,” said Rodriguez, 42, whose team manages more than A$13 billion ($12 billion) in fixed-income assets in Australia. “We see some potential positive signs that maybe there’s a genuine chance that the RBA may be done.”

Australia’s economy is slowing as the fillip provided by a mining-investment boom fades and the pullback in Chinese growth weighs on commodity demand. The Australian Treasury yesterday reiterated forecasts the jobless rate will rise to an 11-year high of 6.25 percent by July, up from 5.7 percent last month.

Record Rate

The RBA has lowered its cash target by 2.25 percentage points since it embarked on its current rate-cutting cycle in November 2011, including a 25 basis point reduction this month.

The Aussie’s record 10-month run above $1 ended in May after the central bank cut its benchmark by a quarter-percentage point to 2.75 percent to stoke growth. The currency has tumbled 8 percent in the past three months to 90.94 U.S. cents as of 3 p.m. in Sydney. That’s the biggest drop among the Group of 10 major currencies.

“I suspect the RBA can cut again in November if they don’t get the requisite transition from growth led by mining-sector investment to other parts of the economy,” Stephen Miller, a Sydney-based money manager at BlackRock, which oversees $3.9 trillion, said in an Aug. 6 interview. He estimates the local dollar will fall toward 80 cents as China slows.

Aussie Weakness

The depreciation of the Australian dollar may help to stimulate demand, according to Aberdeen’s Rodriguez. The risks are skewed to a further decline in the currency, he said in an Aug. 9 interview, although not materially given Aberdeen’s view that the RBA may be finished with its rate cuts.

Australian gross domestic product growth is set to weaken to 2.25 percent in the year through December 2013, the RBA said last week, down from a prediction of 2.5 percent three months earlier.

While Rodriguez said he didn’t necessarily disagree with the RBA’s growth assessment, “there are some signs that perhaps the market has already priced in the bad news and the risks are more on the upside for yields.”

Aberdeen predicts that the yield on the benchmark three-year note will rise to 3.10 percent in 12 months from 2.64 percent today in Sydney. The 10-year rate is likely to climb to 4 percent from 3.85 percent, the fund manager said.

Worst Performance

The nation’s sovereign securities have gained 0.4 percent this year, heading for their worst annual performance since a 2.7 percent loss in 2009, according to Bank of America Merrill Lynch. That’s still the best returns among sovereign markets holding the top rankings from the three biggest credit ratings companies.

Some of Australia’s economic indicators are showing signs of improving, according to Rodriguez, who cited labor-market data on hours worked and house price figures. He also said that income growth hadn’t been too bad.

“Consumption is the key here,” he said. “If consumption can start to turn around on the back of improved income growth and more supportive financial conditions generally -- let’s not forget we’ve seen a lot of rate cuts as well, they haven’t really had that traction but that’s not to say they won’t -- then business investment can follow from that consumption.”

Aberdeen’s view is also supported by a “more constructive outlook” on the U.S. economy.

“Positive U.S. growth can provide positive momentum domestically,” Rodriguez said.

Fed Taper

The possibility that the improving economy will allow the Federal Reserve to start tapering its stimulatory asset purchase program has helped to buoy U.S. yields and narrowed the gap to Aussie debt. The yield premium for Australian three-year debt over similar-maturity U.S. securities narrowed to 183 basis points on Aug. 5, the least since June 5, 2012. The difference was 196 basis points today.

“When you’ve got markets still focused on further rate cuts, we think the domestic outlook suggests bonds are biased to being expensive, not cheap,” said Rodriguez. “It’s not a bullish outlook for the Australian economy, but just that perhaps the pessimism’s been somewhat overdone.”

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