Photographer: Brendon Thorne/Bloomberg

Goldman Asset Sees Aussie Below 70 Cents as Premium Fades

Updated on
  • Australia’s bond premium over Treasuries at 16-year low
  • Hedge funds unwind bullish Aussie wagers as iron ore tumbles

The Australian dollar is set to decline more than 6 percent to around the “high 60s” level versus the greenback as the country loses its yield advantage over the U.S., according to Goldman Sachs Asset Management.

Australia’s interest-rate premium to the U.S. will evaporate by the middle of next year as the Federal Reserve continues to tighten policy while its Australian counterpart keeps its benchmark at 1.5 percent, said Philip Moffitt, Asia-Pacific head of fixed income at the investment manager. The Aussie has declined about 3 percent this quarter, underperforming its Group-of-10 peers.

“One of the reasons why people buy Aussie dollars is it has been a relatively high yielder,” said Sydney-based Moffitt, whose firm oversees more than $1 trillion. “That’s changing. More exposure to China, no rate movement here and rate convergence with the U.S. suggest the Aussie will go lower.”

The extra yield that Australia’s 10-year bonds offer over similar-maturity Treasuries shrank to 16 basis points Thursday, the least since March 2001 and down from as much as 84 last year. The last time the gap was consistently this narrow was in 2001, when the Aussie touched its post-float low of 47.76 U.S. cents. The currency slid 0.6 percent to 73.88 cents Thursday after a private gauge of China’s manufacturing showed the sector contracted for the first time since June 2016.

Hedge funds and other large speculators have unwound almost all of their bullish Aussie wagers, slashing them to the lowest since January, U.S. Commodity Futures Trading Commission data show.

Prices of iron ore, Australia’s biggest export earner, have tumbled 27 percent this year as concerns flare over the outlook for demand in top-user China and burgeoning global supply.

The Reserve Bank of Australia is hamstrung. While it needs to support a weak jobs market, red-hot housing in Sydney and Melbourne constrains it from deploying its already-limited rate ammunition. In the meantime, the Fed is set to raise rates at least two more times this year, Moffitt said.

“It’s quite likely that in 12 months Aussie short rates and U.S. short rates could be basically the same level as the Fed tightens and the RBA does nothing,” Moffitt said. “That’s going to be a hard environment for the Aussie dollar to be strong.”

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