Aussie Rate-Cut Bets Derail World-Beating Gain: Australia Credit

This year’s best-performing major currency is losing steam as the Reserve Bank of Australia reinforces prospects it will consider cutting interest rates unless the economy regains momentum.

Derivatives traders turned the most pessimistic on Australia’s dollar since March and boosted the odds of an interest-rate reduction by year-end to 29 percent, data compiled by Bloomberg show. Futures positions last week saw the biggest bearish shift since January, according to the Washington-based Commodity Futures Trading Commission. The Aussie has dropped 1.8 percent since June 30, paring to 3.9 percent 2014’s advance.

Central bank policy makers fueled speculation that they will reduce the record-low benchmark rate by lowering economic growth and inflation forecasts last week after mining investment slumped. The changes followed a surge in joblessness to a 12-year high of 6.4 percent last month, from 6 percent in June, that surprised analysts and took the rate above that in the U.S. for the first time since 2007.

“The unexpected spike in unemployment last week plays into the view that, if the RBA is going to be doing anything in the next 12 months, it’s cutting rates,” Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney, said by phone yesterday. “I’m a committed Aussie dollar bear.”

Australia’s dollar bought 92.67 U.S. cents as of 12:30 p.m. in Sydney. It will decline to 91 by Dec. 31, according to the median of estimates complied by Bloomberg that range from 85 cents to $1.

Bearish Shifts

The premium on options to sell the Aussie against the U.S. dollar in three months over those giving the right to buy rose to 1.64 percentage points on Aug. 8, the most since March 26, and was at 1.53 today. The risk-reversal rate touched a five-year low of 1.01 percentage points on June 13.

Hedge funds and other large speculators cut net wagers betting on Aussie gains by 6,306 to 33,300 in the week ended Aug. 5.

The change came even before data Aug. 7 showed Australia’s jobless rate rose in July as employers cut 300 positions. The following day the RBA projected gross domestic product of 2 percent to 3 percent in the year through June 2015, down from a range of 2.25 to 3.25 percent forecast three months earlier.

Inflation Weakens

On core inflation, the RBA lowered its forecast to 1.75 percent to 2.75 percent from 2.25 percent to 3.25 percent in May. Policy makers seek to hold the annual rate between 2 and 3 percent.

“The unemployment rate is likely to remain elevated for a time and is not expected to decline in a sustained way until 2016,” the central bank said in its quarterly monetary policy statement last week.

The about 30 percent chance seen that Governor Glenn Stevens and his board will reduce the 2.5 percent benchmark rate by year-end compares with a 14 percent probability seen on Aug. 6, calculations based on overnight cash-rate futures show. A Credit Suisse Group AG measure shows wagers for five basis points of cuts over 12 months.

Pricing for further easing is at odds with the median in a Bloomberg economist survey which predicts no change this year and an increase to 2.75 percent in the second quarter of 2015.

Economists Disagree

“We see the RBA raising rates in February of next year, and the market has got half a chance of a cut at that time,” said Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia, the nation’s largest lender. “That’s an important part of the reason why we’ve got Aussie firming further for the next six months. We’ve got a very different view on the RBA than the market.”

Australian business confidence climbed 3 points last month to 11, the strongest level since September, National Australia Bank Ltd. said today in a statement.

In the U.S., employers have added more than 200,000 jobs in each of the past six months and the unemployment rate was at 6.2 percent in July. Traders are pricing in a 70 percent chance the Federal Reserve will raise its key rate to at least 0.5 percent by September 2015.

An eventual increase may depend on progress on a broad set of joblessness measures, which Fed Chair Janet Yellen has stressed in making the case for maintaining accommodative policy. In her July testimony to House and Senate committees, her discussion of labor-market slack turned on indicators such the participation rate, rather than the unemployment rate alone.

“We’re going to continue to see better U.S. economic data, in particular the labor market, and essentially Janet Yellen is going to be backed into a corner,” David Forrester, a senior vice president for Group of 10 foreign-exchange strategy at Macquarie Group Ltd. in Singapore, said by phone yesterday. Yellen will have to begin discussing rate increases in October and that’s likely to cause a “pretty big step down in Aussie, and pretty quick,” he said.

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