RBA’s Done-for-Now Stance Disbelieved in Swaps: Australia Credit

Traders see the Reserve Bank of Australia cutting rates by year-end, even after Governor Glenn Stevens signaled he’s willing to give record-low borrowing costs time to turn the economy around.

Traders see 69 percent odds the RBA will follow yesterday’s decision to cut the overnight cash-rate target to 2.5 percent by reducing it to 2.25 percent or lower by Dec. 3, swaps data compiled by Bloomberg show. The Aussie remains high, Stevens said yesterday, even after it dropped this year by the most among major currencies.

Stevens indicated future decisions will be data driven and said “further effects can be expected over time” from his 2.25 percentage points of rate cuts over the past two years. That signaled to investors including BlackRock Inc. the RBA may pause to evaluate the economy’s ability to cope with a peak in mining investment. Prime Minister Kevin Rudd, who called an election for Sept. 7, may benefit politically from yesterday’s move in a nation where 90 percent of mortgagees have variable-rate loans.

“Having cut rates they’d like to sit back and give some time to observe the effects of this cut and probably the May one,” said Stephen Miller, a managing director in Sydney at BlackRock, the world’s biggest money manager that oversees $3.9 trillion of assets globally. “It’s that transition from a growth led by mining investment to other parts of the economy that’s troubling them. If another two or three months went by and we weren’t to see any signs that transition was occuring, I think it’s likely that we might get another cut.”

Bond Markets

The yield on Australia’s two-year notes fell three basis points to 2.28 percent after jumping 10 basis points yesterday. It has declined 25 basis points this quarter, the biggest drop among 11 sovereign bond markets that carry the top grades from all three major ratings companies. The 10-year yield slid three basis points today to 3.69 percent, compared with 2.63 percent on similar-dated Treasuries.

Federal Treasurer Chris Bowen said last week the budget deficit will blow out to A$30.1 billion ($27 billion) for the year ending June 30, from an A$18 billion estimate in May. The government also lowered its prediction for growth to 2.5 percent, from 2.75 percent previously.

Reports in the past month also signaled the South Pacific nation’s domestic economy may not be strong enough to weather a looming peak in resources investment. The statistics bureau said this week retail sales stalled in June. While data today showed home loans rose more than forecast over the same period, figures on July 30 indicated building approvals unexpectedly slumped.

Jobless Rate

Economists surveyed by Bloomberg News predict the unemployment rate rose last month to 5.8 percent, the highest in four years, before data due for release tomorrow. The jobless rate will probably rise to 6.25 percent by the middle of 2014, the government estimates.

The rate cut may offset a bleaker economic outlook and prove a boon to Rudd, who faces the challenge of leading his Labor Party into victory in elections next month after trailing the opposition in opinion polls for most of the past year. Rudd returned to the top job in June after defeating Julia Gillard in a leadership ballot.

Aussie’s Plunge

Stevens said yesterday the Australian dollar “remains at a high level” and may depreciate further. Even with recent declines in the currency, “inflation has been consistent with the medium-term target,” he said. The RBA aims for average annual inflation of 2 to 3 percent.

The Aussie fell 0.3 percent to 89.63 U.S. cents as of 4:30 p.m. in Sydney, extending a 12 percent decline in the past three months that’s the biggest drop among the Group of 10 major developed-market currencies. It touched 88.48 on Aug. 5, the lowest level in almost three years.

“‘There’s not quite the explicit easing bias that the RBA has shown in the previous statements, but I think there’s still an implicit easing bias there,” said Ray Attrill, the Sydney-based global co-head of currency strategy at National Australia Bank Ltd. “The currency would have to fall a lot further before it would feed a much stronger inflation outlook, that would then have implications for policy.”

The Aussie will have to drop toward 80 cents to substantially aid manufacturers, according to Kim Carr, Australian minister for Innovation, Industry, Science and Research.

Industry Struggling

The falling dollar “will be an improvement over time that will ease the pressure on Australian manufacturing, but it may be some distance in time before the full benefit of that is felt,” Carr said yesterday in a phone interview. “The Australian automotive industry can start to make money at higher figures, but it requires figures of around 80 cents to secure competitive advantage.”

Australia’s real effective exchange rate remains overvalued by 5 percent to 15 percent, amid a “continued gap between domestic and foreign interest rates,” the International Monetary Fund said in a report published Aug. 1.

Even after yesterday’s cut, the nation’s benchmark borrowing cost is the highest in the developed world alongside New Zealand’s, and compares with 0.5 percent in euro area and near-zero levels in the U.S. and Japan.

“I still think they will cut rates,” Hideo Shimomura, the chief fund investor who helps oversee the equivalent of $60.9 billion in Tokyo at Mitsubishi UFJ Asset Management Co., said in reference to RBA policy makers. “They said the Australian dollar is still high. It means they need a weaker currency.”

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