Photographer: Brendon Thorne/Bloomberg

Aussie Bears Buoyed as Rate-Cut Bets Halt Rally

Updated on
  • UBS’s wealth management unit sees Aussie falling to 68 cents
  • BlackRock neutral on currency amid ‘too many unknowns’: Miller

The stars are finally aligning for Aussie bears.

UBS Group AG’s wealth management unit remained steadfast that the Australian dollar would weaken even amid a 5.5 percent, seven-week surge to July 15, said Wayne Gordon, executive director for commodities and foreign exchange. The currency slumped 1.5 percent last week as swaps traders boosted bets on easing by the Reserve Bank of Australia and tightening from the Federal Reserve. That’s also good news for Eaton Vance Corp. and Insight Investment Management Ltd., a Bank of New York Mellon Corp. unit, which have short positions in the Aussie.

“We stuck to our guns,” said Gordon, who is based in Singapore. “There is a risk that the RBA will have to cut rates even further. That will further erode the Australian dollar’s value, particularly if the Fed hikes rates at the same time.”

The yield premium that Australian debt offers over U.S. Treasuries shrank to the least in 15 months last week, and is set to narrow further should the RBA ease and the Fed raise rates, according to UBS. The RBA predicted Australia’s growth moderated in the second quarter and inflation is set to remain weak as momentum in the job market slowed, according to minutes of its July 5 meeting, when it kept its benchmark unchanged.

Aussie Bets

UBS wagered on the Aussie’s decline back before the central bank cut its benchmark to a record on May 3, according to Gordon. With the currency down more than 2 percent since then, the private bank’s bets were still profitable even after the seven-week rally, he said. The world’s biggest wealth manager also made money selling the Aussie versus its Canadian counterpart in the first half of the year, he said.

The Swiss bank predicts the Australian dollar will slump almost 10 percent to 68 U.S. cents in 12 months. Analysts expect the currency to weaken to 71 cents by year-end, according to their median estimate, from 74.76 cents as of 10:23 a.m. in Sydney Monday.

The Aussie is set to slide as prices of iron ore, Australia’s largest export, will likely retreat to below $50 by December, after gaining almost 30 percent this year to about $56, said UBS’s Gordon. Slowing fixed-asset investments in China signal a cooling housing market, damping demand for Australia’s commodities, he said.

Remaining ‘Neutral’

BlackRock Inc., the world’s largest money manager, has been "neutral" on the Aussie for almost two months as it awaits clarity surrounding the Australian and U.S. central banks’ policy path, the outlook for the economy and commodity prices, said Stephen Miller, head of fixed income for Australia.

Global events, including negotiations over Britain’s withdrawal from the European Union and the U.S. presidential race, cloud the outlook for the Aussie in the short term, Sydney-based Miller said. Demand by yield-hungry investors for Australian debt will support the currency, he said.

While the Aussie is set to slide toward 65 cents in the next six to 12 months, it will probably trade in the “mid-to-low 70s” in the next three months, Miller said.

‘Many Unknowns’

“I don’t see shorting the Aussie dollar as a great risk-reward trade at the moment,” Miller said. “There are too many unknowns for us to contemplate wanting to position with any conviction.”

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Aussie compared with those on a drop -- so-called net longs -- rose to 33,431 on July 19, the most since May 10, according to Commodity Futures Trading Commission data.

Second-quarter inflation data due Wednesday may provide a guide as to whether the RBA will ease again in August. The lowest core inflation reading on record in the first three months of the year prompted the move in May.

“If we get a weak inflation print, that will give the green light for the RBA to move lower again in rates,” said Paul Lambert, London-based head of currencies at Insight Investment Management. The manager has a “small short position” in the Aussie, he said.

Traders were pricing in about a 64 percent chance of a cut in August on Friday, compared with 40 percent a month earlier.

“Ultimately, the RBA will be forced to cut rates more, partially to get a weaker Australian dollar,” said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance, which oversees about $326 billion. “The currency can certainly go significantly lower over the medium term.”

— With assistance by Ken McCallum

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