The Australian dollar’s surge to a four-month high is keeping alive the prospect of a reduction in interest rates for Goldman Sachs Asset Management, even as four in five economists polled say the central bank’s easing is done.
Governor Glenn Stevens will hold the benchmark at a record-low 2.5 percent at tomorrow’s meeting in Melbourne, according to all 33 economists surveyed by Bloomberg News. Further out the forecasts diverge, with 12 expecting at least one interest-rate increase by year end, 15 betting on a static cash rate, and 6 projecting a reduction.
Australia’s dollar climbed 3.6 percent this month, the most among Group of 10 currencies, as stronger-than-forecast employment, building and trade reports added to confidence the nation’s economy is picking up speed even as China’s outlook worsens. Stevens on Feb. 4 signaled the end of his easing bias and flagged a “period of stability” in borrowing costs.
“Having told us that rates are on hold now for the foreseeable future and the currency appreciating straight away, I think it’s likely that you probably get another cut,” Philip Moffitt, head of fixed income for Asia-Pacific at Goldman Sachs AM, said in an interview. “With the currency where it is, there’s not going to be enough activity or growth coming from tourism and education to compensate for the terms of trade adjustment.”
With a once-in-a-century mining investment and commodity prices boom waning, the Reserve Bank of Australia is trying to spur domestic industries such as residential construction to take over as growth drivers. Policy makers have said they’d prefer a lower currency to help that transition and boost industries exposed to international competition.
There are encouraging early signs that a handover from mining-led growth to domestic consumption is taking place and the economy may strengthen later this year, Stevens said in a March 26 speech in Hong Kong.
“This outlook is, obviously, a balance between the large negative force of declining mining investment and, working the other way, the likely pick up in some other areas of demand helped by very low interest rates,” he said.
When asked about the currency, Stevens reiterated it would be surprising if it didn’t weaken with Australia’s terms of trade. He didn’t express fresh concern about its recent advance.
While the jobless rate held at a more than 10-year high of 6 percent in February, the economy added 47,300 workers, more than three times the number forecast by economists. The nation reported a trade surplus of A$1.43 billion for the previous month, 14 times economists’ forecast, and approvals to build new dwellings surged 34.6 percent in January from a year earlier.
Private sector credit grew 4.3 percent in February from a year ago, the quickest pace since June 2012, central bank data today showed.
Record house prices and inflation above the mid-point of the RBA’s target band will keep the RBA on hold for a “fairly lengthy period” even amid concern that the high currency is hurting growth, said Sydney-based Michael Blythe, chief economist at Commonwealth Bank of Australia.
“It’s a fine line really: yes, you want a lower currency because it helps growth, but it’s obviously a negative for the inflation backdrop,” he said. Stevens’s reluctance to be more critical of recent Aussie gains may suggest “a bit more concern about upside inflation risks now than there had been.”
The Aussie, the world’s fifth most-traded currency, bought 92.46 U.S. cents as of 12:01 p.m. in Sydney after touching 92.95 on March 28, its highest level since Nov. 21. Swaps traders are pricing 15 basis points will be added to the RBA rate within 12 months, according to a Credit Suisse Group AG index.
Australia’s two-year bond yield has climbed 17 basis points this month to 2.84 percent as traders increased bets on an interest-rate increase. The 10-year rate is up eight basis points at 4.10 percent.
China’s economy is showing signs of losing momentum as the nation’s leadership attempts to curb credit risks, reduce pollution and implement more market-based pricing. Prices of iron ore, Australia’s biggest shipment, slumped 16 percent this year, while an RBA commodity index priced in Aussie dollars fell 2.6 percent in the first two months of the year.
“We think there’s going to be a lot of noise and nervousness around Asia and in particular that’s driven by the China view,” Moffitt said.
He’s positioned for a steepening in Australia’s yield curve with short-end yields anchored or falling as RBA expectations change, while long-end rates follow the U.S. higher. The difference between two- and 10-year yields fell to 125 basis points on March 27, the narrowest in eight months.
“The external environment for Australia is deteriorating,” said Moffitt. “On balance, with the currency above 90, I think probably there’s another cut.”