RBA’s Vanishing Bias to Cut Drives Aussie Gain: Australia CreditCandice Zachariahs and Wes Goodman
Reserve Bank Governor Glenn Stevens omitted any mention of having scope for further monetary easing for the third policy meeting in a row. Traders are taking that as a green light to drive the local currency higher.
The Aussie extended its biggest monthly advance in more than a year yesterday after the RBA left rates at a record-low 2.5 percent, gaining against all but one of 16 major peers. Stevens reiterated that further declines in a currency that has slumped 9.9 percent this year would assist growth, while flagging that previous rate cuts are supporting parts of the economy.
“They do want a weaker currency, but they acknowledge that there’s little they can do about that at this stage if they don’t think they need to cut rates anymore,” said David Forrester, a senior vice president for Group of 10 currency strategy at Macquarie Bank Ltd. in Singapore. “The market will now begin to price in that the RBA is done and start to price in rate hikes next year.”
The RBA decision came after data showed Australian home prices surged to a record, manufacturing expanded for the first time in two years and retail sales beat forecasts. Sentiment among businesses and households is strengthening as the impact of 2.25 percentage points of rate cuts over two years filters through the economy, Stevens said yesterday.
The RP Data-Rismark capital city index of home prices jumped 5.5 percent from a year earlier across Australia’s major cities, exceeding by 0.7 percent the previous record level for the gauge set in October 2010, according to an e-mailed release yesterday. Sydney and Melbourne led gains in the three months to Sept. 30, climbing 5.2 percent and 5 percent respectively to all-time highs, based on data that goes back to 1996.
A Performance of Manufacturing Index climbed to 51.7 in September, breaching the 50 level that signals expansion for the first time since June 2011, the Australian Industry Group said. Separate data showed consumer spending climbed 0.4 percent in August versus the median forecast for a 0.3 percent advance in a Bloomberg News survey of economists.
Aberdeen Asset Management Plc predicted in August the central bank had finished cutting rates and said investors were too pessimistic on the Australian economy. The money manager doubts currency gains on their own will compel the RBA to resume lowering borrowing costs.
“House prices are improving, housing finance is on an upward trend, and with consumer confidence being reasonably strong we think the household sector will increase spending,” said Justin Tyler, a Sydney-based senior investment manager at Aberdeen, which oversees A$14 billion ($13.1 billion) of fixed-income assets in Australia. “The currency itself doesn’t put direct pressure on the RBA, it’s how the real economy reacts to the currency that is important.”
Business and consumer confidence surged in the leadup to the Sept. 7 election victory for Prime Minister Tony Abbott’s Liberal-National coalition. Abbott defeated the Labor minority government pledging to lower taxes and cut red tape to spur the $1.5 trillion economy as a China-led mining investment boom crests.
Australia’s dollar traded at 93.65 U.S. cents as of 12:49 p.m. in Sydney, after gaining 0.9 percent yesterday. The world’s fifth most-traded currency rose 4.7 percent in September, the biggest monthly advance since June 2012.
The bar for a November RBA cut is “pretty high,” though continuing gains in the Aussie may force a further reduction, said Macquarie’s Forrester.
Traders haven’t ruled out another cut. The odds that the RBA will reduce its benchmark to 2.25 percent or less by April are 54 percent, based on swaps data compiled by Bloomberg.
A lower currency will help the Australian economy manage the end of a record mining investment boom, the RBA said. A weaker Aussie makes exports cheaper to overseas buyers including China, the biggest consumer of the South Pacific nation’s shipments, and supports manufacturing and tourism.
Australia’s trade deficit was wider than analysts forecast at A$815 million in August, the statistics bureau said today, compared with the Bloomberg median estimate of A$400 million. The gap for July was revised higher to A$1.4 billion from A$765 million. A separate report showed building approvals in August also missed estimates, falling 4.7 percent.
The Bureau of Resources and Energy Economics raised its forecast for earnings from the export of minerals and energy resources on a falling currency and rising volumes. The value of offshore sales may total A$203.76 billion in the year started July 1, according to a report today. That compares with A$197 billion forecast in June and A$177.4 billion a year earlier, it said.
Australia is also dealing with an uncertain outlook for its largest trading partner. A Chinese factory gauge rose less than economists forecast yesterday, signaling limits on the nation’s rebound from a two-quarter economic slowdown. The Purchasing Managers’ Index was at 51.1 for September, compared with the 51.6 median estimate in a Bloomberg survey, official data showed.
“We are not 100 percent sure that Australian central bank easing has come to an end,” said Naruki Nakamura, the head of fixed income at BNP Paribas Investment Partners Japan in Tokyo, which has the equivalent of $7.8 billion in assets. “I’m not so convinced about a durable rebound in the Chinese economy. In that sense, I’m also not 100 percent convinced about the Australian dollar.”
The Aussie will trade in a range of 89 U.S. cents to 97 cents through the end of the year, he said.
Gains in the Aussie are also being supported by central banks who continued to buy Australian assets in the second quarter, even as the currency slid 12.3 percent, according to an International Monetary Fund report released Sept. 30. The Aussie’s share in foreign exchange reserves rose to 1.7 percent from 1.6 percent in the first quarter, the data showed.
Central banks have different time horizons, risk tolerance and objectives than other market participants, said Ankit Sahni, a New York-based currency strategist at Nomura Holdings Inc., before the RBA decision. “It’s not surprising that they’re going against what the rest of the market is doing.”
Adjusted for currency movements, central banks bought $13.4 billion in Aussie-based assets, led by $9.4 billion in buying by developed nations, Nomura said, citing the IMF data.
The RBA’s key policy rate will remain unchanged until the third quarter of 2014, according to 13 of 33 economists surveyed by Bloomberg before yesterday’s decision. Twelve forecast at least one further cut and eight expect interest rates to rise, the poll showed.
“There was no explicit bias from the RBA, signaling they’re on hold for now and no real strong attempt to talk down the Australian dollar,” said John Horner, a Sydney-based currency strategist at Deutsche Bank AG. “It’s going to take a significant accumulation of negative data from here to move them away from their current stance.”