Photographer: Brent Lewin/Bloomberg

Bears Say 70 U.S. Cents Looms for the Aussie Dollar

Updated on
  • RBA to stay ‘on hold as far as the eye can see,’ Aberdeen says
  • Aussie slid 2.3% in October, biggest monthly decline this year

Short the Australian dollar as the extra yield on the nation’s bonds over U.S. Treasuries is about to vanish.

That’s the view of Aberdeen Standard Investments and AMP Capital Investors Ltd., saying the country’s yield premium will disappear for the first time since 2000 and may even become a discount. Disappointing economic data has spurred traders to push back forecasts for when the Reserve Bank of Australia will raise interest rates, sending the currency to three months of losses. The central bank kept its benchmark at a record low Tuesday.

“The RBA is on hold as far as the eye can see,” said James Athey, London-based senior investment manager at Aberdeen, which manages about $760 billion. “Many people still view the Aussie as having high carry when increasingly this is not as much the case.”

Australia’s dollar is set to fall to 70 U.S. cents as the RBA’s dovish stance contrasts with a Federal Reserve that will probably raises rates three more times next year, he said. The currency was at 76.94 cents on Tuesday.

The Fed upgraded its assessment of the U.S. economy in its policy meeting last week, using the word “solid” to describe growth for the first time since January 2015. That contrasts with how softer inflation data and misses on retail sales in Australia have damped talk of a rate increase.

Australia’s 10-year bonds yielded 2.59 percent on Tuesday, 26 basis points above similar-maturity U.S. Treasuries. The premium has shrunk from more than 60 basis points in September, and more than 1 percentage point in late 2014.

Dovish Signs

The RBA left its overnight cash rate at 1.5 percent Tuesday, as forecast by all 27 economists surveyed by Bloomberg. Swaps traders have pushed back expectations of when the central bank will tighten to August, from the first half of 2018, as economic data including inflation fell below forecasts.

The Aussie tumbled 2.3 percent in October, the worst month since December, and dropped to a three-month low of 76.25 cents on Oct. 27.

For now, a decline to 74 cents in the near term is a “reasonable target,” Aberdeen’s Athey said, adding he’s also betting on gains in Aussie bonds and losses in Treasuries.

AMP Capital says the Australian dollar will stay under pressure as the RBA is unlikely to be in a position to raise rates for at least another six months.

“Mid-to-late 2018 is the earliest for RBA rate hikes, unless global growth accelerates significantly,” said Nader Naeimi, who heads a dynamic investment fund for the company in Sydney. “Inflation is more likely to surprise in the U.S. than in Australia.”

Still, Naemi said he plans to close his fund’s short position if the Aussie falls to around 73 cents. “The narrowing of the yield differentials will be a headwind for Aussie, but the strong breadth in global economic growth and rising commodity prices will be a cyclical tailwind,” he said.

Fair Value

Not everyone is bearish. Australia & New Zealand Banking Group Ltd. recommends buying the Aussie at 76.50 cents, with an initial target of 79 cents. The Melbourne-based bank will reassess if the currency falls to 75.25 cents.

“The recent move in the Australia-U.S. spread is unjustified by the broad economic circumstances and we think that market pricing for the RBA has become too downbeat,” Daniel Been, head of foreign-exchange research, wrote in a report Monday. “Commodity prices look more likely to rise then fall in the month ahead.”

The latest positioning data shows the market is still bullish on the Aussie but is trimming its stance.

Hedge funds and other large speculators cut their leveraged Aussie longs to 54,261 contracts in the week ended Oct. 31 from 86,204 at the end of August, data from the Commodity Futures Trading Commission show.

The net bullish position means there’s greater room for the currency to decline if sentiment worsens, Aberdeen’s Athey said.

“That’s fuel for the fire when the selloff really comes,” he said.

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