Photographer: Brendon Thorne/Bloomberg

Aussie Dollar Bulls Target 80 U.S. Cents

Updated on
  • Central bank may be more likely to hike than cut: Eaton Vance
  • Options traders are least bearish on currency since April 2009

The Australian dollar is set to build on its rally and surge to 80 U.S. cents, the strongest level in more than two years, as the central bank said the economy is improving, according to money manager Eaton Vance Corp.

Eaton Vance, which started to build wagers for a stronger Aussie in May, said yields on the nation’s bonds are attractive relative to U.S. Treasuries and the Reserve Bank of Australia would be more likely to tighten, than ease policy. UniCredit SpA, the most-accurate Aussie forecaster in Bloomberg’s latest rankings, said last week investors will probably re-price the Aussie, which the bank forecasts will rise to 80 cents this quarter before advancing to 85 cents next year.

The Aussie surged as much as 1.6 percent to its highest level since May 2015, after minutes from the RBA’s July policy meeting showed that it expected quarterly growth to have increased in the second quarter. Bond yields jumped as the central bank said a neutral interest rate could be around 3.5 percent, which is about two percentage points above the current record-low level.

“The market is extrapolating the RBA’s acknowledgement of firmer global prospects, and its comment that neutral rate is 3.5 percent, to a central bank with its finger on the trigger to hike,” said Sue Trinh, head of Asia FX strategy at RBC Capital Markets in Hong Kong.

The Aussie rose 1.6 percent to 79.29 cents at 10:23 a.m. in London. The extra yield that Australia’s 10-year bonds offer over similar-maturity Treasuries widened to 44 basis points, the highest since Dec. 2. Options traders were the least bearish on the currency since April 2009, according to one-month risk reversals.

“The economy has been doing pretty well recently and the housing market is very strong,” said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance. More importantly, RBA Governor Philip Lowe is focused on financial stability, which suggests the threshold for a rate cut below the current level of 1.50 percent is very high, he said.

Aussie bonds also look cheap relative to Treasuries, with the potential for “roll-down and carry,” he said.

Australia’s easy policy has sent house prices soaring in Sydney and Melbourne, encouraging residential construction that’s soaked up former miners. The jobless rate has fallen to 5.5 percent, though under-employment remains high, prompting the RBA to note the stronger labor market removes “some of the downside risk” to its wage-growth forecasts.

Employment Growth

Swaps traders boosted their bets for a rate hike in May to almost 60 percent, from around 40 percent Monday.

The moving average convergence divergence momentum indicator, or MACD, is above zero, and signals a continuing upward trend. Leveraged funds increased their net long position to 37,631 in the week ended July 11, still below the high of 53,601 in week ended March 7, according to the Washington-based Commodity Futures Trading Commission.

The Aussie also got a boost from a weaker dollar, as the opposition of two more Republican senators to the U.S. healthcare bill meant the measure was effectively dead in its current form.

READ: Hedge Fund Aussie Bulls Are Hoping Fifth Time the Charm

Still, the RBA’s minutes signaled that it wasn’t in a hurry to follow its counterparts in the U.S. and Canada in raising rates, as the outlook for the housing market and jobs remains clouded. The central bank reiterated that “an appreciating exchange rate would complicate” the economy’s adjustment from the mining investment boom.

“The world is less in need of triage and intensive care from central bankers than it was, and more of them are thinking about how, and when, to set out on the road to normalization,” Kit Juckes, a London-based strategist at Societe Generale SA, wrote in a note to clients. “Markets, priced for ‘low forever’, are being forced to rethink too, and after the Bank of Canada, now it’s the RBA which is in the spotlight.”

— With assistance by Patricia Lui, Masaki Kondo, and David Finnerty

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