Photographer: Brent Lewin/Bloomberg

Aussie Seen Foiling RBA’s Goal Without More Stimulus

Currency traders are telling Reserve Bank of Australia Governor Glenn Stevens that he’s not going to reach his goal of a weaker local dollar unless he adds to record stimulus.

Stevens identified 75 U.S. cents as an exchange rate that would help the economy become more competitive. Since the central bank cut borrowing costs on Feb. 3, the Aussie has twice fallen to within 2 percent of that level, only to bounce back.

If the RBA wants to get there, it will have to lower interest rates again when officials meet in March, and perhaps once more in May, according to Commonwealth Bank of Australia. While falling commodity prices have hurt the currency in recent months, losses have since stalled as raw materials stabilized and investors were lured to the highest bond yields of any top-rated sovereign.

“The thing they can do with the most impact is to cut rates,” Joseph Capurso, a Sydney-based strategist at CBA, the nation’s biggest lender by market value, said by phone Monday. “If the RBA reduces rates again, chances are that the market will price in even more cuts. That will pull down the Aussie dollar.”

Jawboning History

Merely holding borrowing costs at an all-time low, as Stevens did for 1 1/2 years before acting this month, is no longer enough, Capurso said. With lower borrowing costs, Australia’s dollar will slide to 73 cents by the end of June, he predicted.

The Aussie rose 0.5 percent to 78.15 cents as of 12:09 p.m. in New York after the RBA published the minutes of its Feb. 3 meeting. The minutes showed policy makers debated whether to cut borrowing costs straight away or wait a month.

“The fact that the RBA debated whether to move in February or March seems to suggest there may not be urgency for a follow-up cut,” said Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore. “That’s given support to the Aussie dollar.”

Most forecasters don’t see Stevens attaining his goal. The median of more than 50 estimates compiled by Bloomberg puts the Aussie at 77 cents by mid-year and 76 by Dec. 31.

Options prices also suggest the chances of Stevens achieving a weaker currency are diminishing.

Premium Shrinks

The premium that traders pay for contracts giving the right to sell the Australian dollar, compared with those to buy, narrowed to 2.07 percentage points from a 1 1/2-year high of 2.76 on Feb. 2, data compiled by Bloomberg show.

Stevens has been trying to talk down the Aussie since at least 2013. He called 75 cents his preferred level in an interview with the Australian Financial Review published on Dec. 12. A weaker currency encourages growth by making a nation’s products cheaper to buy overseas.

The 30 percent decline in iron ore, Australia’s main export, has outpaced the Aussie’s 16 percent slide against the U.S. dollar in the past six months.

The local currency is little changed this month, supported by stabilizing oil prices and a key interest rate of 2.25 percent that still offers returns at a time when borrowing costs are near zero for the euro region, the U.S. and Japan. Australia’s 10-year bond yield, at 2.53 percent, is topped only by New Zealand, Iceland and Greece among advanced nations.

Steven’s ‘Worried’

“Stevens is worried” the Aussie’s losses “may unwind if the market returns to focus on a search for yield, and capital might flow from zero- or negative-rate currencies,” Greg Gibbs, head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore, said Feb. 13. “The market has already reacted to the rate cuts and the delivery of one more in coming months won’t be a surprise.”

Australia’s dollar fell to an almost six-year low of 76.26 U.S. cents on Feb. 3, when the central bank reduced its main rate a quarter-percentage point. Within 12 hours, it had rallied to 78 cents. The currency slumped again to 76.44 on Feb. 12 when a report showed the jobless rate increased, only to climb back above 77 the same day.

Gibbs forecast the Aussie will weaken to 74 cents by year-end as iron ore and energy prices slide and the prospect of higher U.S. rates boosts demand for the greenback.

While falling commodity prices have devalued the currency, they’re also hurting the economy as a resources boom ends and growth slows in China, which buys more than a third of Australia’s exports.

Lower Forecasts

The RBA lowered its 2015 growth forecast on Feb. 6 to a range of 1.75 percent to 2.75 percent, from 2 percent to 3 percent in November. Policy makers said the Aussie “remains above its fundamental value” given the slump in commodities.

Further monetary stimulus still looks likely to derivatives traders. There’s about a 59 percent chance the RBA will reduce rates when it meets on March 3, up from 35 percent odds the day after the Feb. 3 decision, according to swaps prices compiled by Bloomberg.

“If the currency started going back up through 80 cents, that might be enough for more than one further cut,” Philip Moffitt, the head of Asia-Pacific fixed-income at Goldman Sachs Asset Management in Sydney, said in an interview on Feb. 11. “I see it as a trade-off between the currency and rates.”

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