The Australian dollar’s world-beating rally in the past three months and bets it will extend those gains are fueling speculation policy makers will try to talk down the currency.
The Aussie strengthened at least 1 percent against all its Group of 10 currency peers since the middle of March and a trade-weighted index climbed to the highest since November yesterday, as the European Central Bank set negative interest rates this month. The cost of three-month contracts allowing sales of the Australian versus the U.S. dollar is near the least expensive versus those to buy since July 2009. Net futures positions betting on gains are the most since April 2013.
The Aussie has rallied as low rates in Europe, the U.S. and Japan encouraged investors to borrow in those countries and seek higher returns overseas in carry trades. The Reserve Bank of Australia reiterated today in minutes of its June 3 policy meeting that the currency was high by historical standards, particularly given the slide in commodity prices.
“The combination of soft commodity prices and a strong currency driven by the carry trade remains a difficult mix for the RBA to manage,” Robert Rennie, head of currency and commodity strategy at Westpac Banking Corp. in Sydney, said yesterday. “The last thing that you really want to leave unchecked is signs of increasing momentum if the carry trade really is an important driver.”
If markets are showing signs of becoming lopsided in favoring the carry trade, then it’s important for the RBA to “get the message out there,” he said. Rennie said he would be paying closer attention to commentary from the RBA. Policy makers next meet on July 1 and Governor Glenn Stevens is scheduled to speak at a conference on July 3.
The RBA has held its key rate at a record-low 2.5 percent since August, after cutting the benchmark by 2.25 percentage points starting in November 2011, as it tries to mitigate the impact of declining resource investment on economic growth. Swaps pricing show a 32 percent chance the central bank will increase the rate during the next 12 months, according to a Credit Suisse Group AG Index.
In the minutes released today, the central bank said it’s hard to gauge how much low rates will offset a decline in mining investment and tighter fiscal policy, adding the currency was providing less assistance to rebalancing growth.
“The RBA is still cautious about the economy,” Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia, said today. “The RBA do not want markets to price in higher rates, which would also push up the Australian dollar.”
The RBA also noted the current low volatility in currency markets, which some analysts say helps spur demand for carry trades by reducing the chance they will get upended by swings in exchange rates.
Australia’s dollar fell 0.4 percent to 93.60 U.S. cents as of 1:15 p.m. in Sydney, paring gains in the previous three months to 3 percent. The 25-delta three-month risk-reversal rate for the Aussie indicated a 1.01 percentage-point premium on options that grant the right to sell the currency over those allowing for purchases on June 13, the least since July 2009.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the Aussie compared with those on a decline -- known as net longs -- was 28,247 on June 10 from 21,527 a week earlier, according to figures from the Washington-based Commodity Futures Trading Commission.
Australia’s 10-year bond yield was 3.71 percent today, the highest after Iceland, Greece and New Zealand among 25 developed nations tracked by Bloomberg.
The RBA, which late last year said the Aussie was “uncomfortably high,” dropped the reference at its February meeting as the currency traded below 90 U.S. cents and the central bank moved to a neutral bias. In March, policy makers added that it was high by historical standards, language they retained in April and May.
This month Governor Stevens expanded his currency comments saying “the exchange rate remains high by historical standards, particularly given the further decline in commodity prices.”
An index of the nation’s main commodities denominated in Australian dollars fell for a fourth month in May, making it down 9.5 percent this year, amid concern China’s economy is slowing. Prices of iron ore, Australia’s chief export, have slumped 34 percent since Dec. 31 and fell to $89 yesterday, the lowest level since September 2012.
The Aussie is more than 5 percent overvalued on a trade-weighted basis, which probably prompted the central bank to adjust references to the currency in this month’s statement, according to UBS AG, which attempts to replicate the RBA’s currency model.
The RBA needs an easing bias to speak forcefully about the value of the Aussie and weak economic data or a low inflation reading would probably allow them to consider cutting interest rates, Matthew Johnson, a strategist at UBS in Sydney, said yesterday. Another 5 percent move higher in the Aussie would also prompt comments, he said.
“I see that as being the first step along the path of beginning to ramp up the currency rhetoric but, obviously, it’s not quite as forceful as saying the currency is uncomfortably high,” he said. “It’s possible that the currency could become uncomfortably high.”