Goldman Asset Says One RBA Cut Not Enough on Robust Aussieby
Citigroup says buy Aussie as trade of week as bull case holds
Central bank lowered benchmark rate to 1.75% from 2% Tuesday
Goldman Sachs Asset Management says Australia’s move to a record-low policy rate won’t be enough to weaken the currency as much as the central bank desires and that will spur another reduction by year-end.
Governor Glenn Stevens and his board will probably follow Tuesday’s easing with another in the final quarter, pushing down the cash rate to 1.5 percent, according to Philip Moffitt, Sydney-based head of Asia-Pacific fixed income. The RBA will be prompted to act again as the Aussie fails to drop toward the 70 U.S.-cents level that policy makers probably favor, Moffitt said. Australia stands out as having among the highest sovereign bond yields among developed market peers and investors will use weakness in the currency to buy into the nation’s assets, he said.
“It’s going to be hard for the currency to go down and stay down,” Moffitt, who in December predicted there was money to be made betting the Reserve Bank would lower rates, said in a telephone interview. “We are a relatively high-yielding, high-quality place to park your money and I don’t see an end to the demand for our assets based on that.”
Australia’s dollar fell 2.4 percent on Tuesday as the RBA resumed easing after almost of year of inaction. The currency was at 75.03 cents as of 10:10 a.m. in Sydney on Wednesday, still 3 percent stronger than on Dec. 31.
Citigroup Inc., the world’s largest currency trader, recommended investors buy the Aussie as its trade of the week because the bull case for the currency was “little shaken” after the cut. The bank set a target of 77.59 cents.
“The lack of explicit easing bias from the RBA suggests subsequent easing, if any, will take much more data to support,” Josh O’Byrne, a London-based strategist at Citigroup, wrote in an e-mailed report. “We think investors have room still to add long positions in Australia’s dollar.”
Hedge funds and other large speculators betting on Aussie gains have outnumbered those expecting declines since the middle of February, with net longs reaching a three-year high on April 26. The following day, surprisingly low inflation figures prompted some investors to sell the currency before Tuesday’s central bank decision.
Governor Stevens said in his statement that recent inflation data was “unexpectedly low” and along with other factors pointed to reduced price pressures than were previously anticipated. A lower exchange rate had helped parts of the economy exposed to trade, though gains in the currency could complicate the economic adjustment, he said. The next inflation report is due July 27.
Goldman Sachs Asset Management, which oversees or advises on more than $1 trillion globally, isn’t calling for the Aussie to go down a lot now and still sees room for yields on shorter-maturity securities to fall, Moffitt said.
“Unless commodity prices rise a lot, next time we get an inflation number, if it continues to be low and the currency hasn’t gone down, you’ll get another rate cut,” Moffitt said. “The transmission’s going to be through the currency.”