- Currency currently near the level it was at before May RBA cut
- Goldman fund manager sees further easing from central bank
The Australian dollar is likely to extend its rally toward 80 U.S. cents and that’s when investors should consider betting against it, according to Goldman Sachs Asset Management.
The currency has shrugged off half a percentage point of interest-rate cuts from the Reserve Bank of Australia and climbed 4.2 percent this year to 75.91 cents as of 12 p.m. on Monday in Sydney. Philip Moffitt, who heads the fund manager’s Asia-Pacific fixed-income team, said the central bank could get “nervous” around the 78-to-80 cent mark.
“Australia is still offering positive yield and a stable currency and that is going to put upward pressure on the Aussie and, at some point, the RBA will have to cut rates again,” Moffitt said in an interview in Sydney last week. “The currency will get a little bit stronger, but I think the bigger bet for us is to wait to sell it again rather than enter now to get the uptick. The bigger opportunity is for us to wait for it to get to 80.”
Even with yields near unprecedented lows, Australian bonds continue to lure international investors seeking alternatives to the negative rates on offer in places such as Japan and Europe. With the RBA cash rate at 1.5 percent and the 10-year yield at 1.91 percent, Aussie notes also offer a premium over U.S. Treasuries and are issued by one of just 10 sovereigns to hold top credit scores from all three major rating assessors.
The RBA’s decision to cut rates by a quarter point earlier this month in response to weakening inflation has done little to dent the currency, which touched a high of 77.56 cents on Aug. 10. That was the strongest level since April, when the central bank benchmark was still at 2 percent. With the swaps market pricing a roughly even chance of another cut before the year is done, there’s potential for more Aussie dollar appreciation should policy makers choose not to act. The median estimate among economists surveyed by Bloomberg is that another rate cut won’t come until the first quarter of 2017.
The currency is also hostage to the deliberations of the U.S. central bank, which has continued to state that interest-rate increases that would be likely to buoy the greenback will be gradual. The futures market there is now indicating that the Federal Reserve is about as likely to hold rates for the rest of 2016 as it is to tighten policy.
Moffitt reckons that the RBA will have to cut again “because as a relatively high-yielding market -- and particularly with the U.S. looking like doing less and less -- Australia is a natural place for capital to flow. That will put upward pressure on the currency and takes away the second potential lever for stimulus.”
The RBA has previously stepped up its rhetoric on the currency when it’s been trading at or just below the 80 cent mark, he said.
The central bank reiterated this month that an appreciating exchange rate could “complicate” the Australian economy’s adjustment as it shifts away from its reliance on mining investment to alternative sources of growth such as tourism and education. While that type of language shows that the currency is clearly on policy makers’ minds, the board’s tone remains less forceful than in previous periods of strength when it said that the Aussie dollar ought to be weaker.
Governor Glenn Stevens and his successor Philip Lowe won’t necessarily be rushing to lower the benchmark too quickly, according to Moffitt. With rates already at historic lows, they’ll be looking more at “alternative policy stimulus,” he said.
“I notice there’s been quite an increase in conversation around fiscal stimulus and investing in infrastructure and calling it investment rather than borrowing,” Moffitt said. “Practically that’s what’s likely to happen before the RBA cuts again.”
He also said that the central bank would also need another push from inflation. While annual consumer price gains are running at just 1 percent and growth in core measures has dropped to the least on record, the RBA predicts that underlying inflation will remain “low for a time before picking up gradually,” according to minutes of its most recent meeting.
“There are a number of reasons why the RBA would want to communicate that they’re done with cuts,” Moffitt said. “They’ve now moved to reflect a lower inflation outcome than expected. They can say they’ve responded to that and they don’t need to respond again. They need even more indication of lower inflation to force them.”