markets

Goldman Sees the Australian Dollar Falling to 72 Cents

Updated on
  • 10-year Treasury yield to hit 3.5% by year end, Moffitt says
  • Australian dollar is second-worst performing G-10 currency
Bloomberg’s Ruth Carson explains why Goldman Sachs expects the Aussie to drop another 5 percent this year.

Australia’s dollar is poised to drop another 5 percent this year as the central bank stays on hold while the Federal Reserve keeps raising interest rates, Goldman Sachs Asset Management says.

The Aussie will decline to 72 U.S. cents by year-end as restrained economic growth and inflation mean the Reserve Bank of Australia will take a “few years” to catch up with the Federal Reserve in raising borrowing costs, said Philip Moffitt, Asia-Pacific head of fixed income in Sydney at the firm, which oversees more than $1 trillion.

The yield premium that Australian bonds enjoyed over Treasuries from 2000 swung to a discount this year, as disappointing economic data pushed back expectations for the RBA to hike while U.S. policy makers moved ahead. The Aussie is set for a third month of declines, and is the second-worst performer among the Group-of-10 peers this year.

“It’s hard to be bullish on the Aussie,” Moffitt said in an interview last week. “There’s going to be a pretty decent period of sluggish growth without much inflation. We’ve also still got slack in the labor market -- put all of these factors together and we’re a few years behind the U.S. on rates.”

The Aussie has dropped around 3 percent this year against the dollar, hurt by concerns that a trade dispute between the U.S. and China will affect demand for its iron-ore exports. Prices for the steelmaking ingredient have also dropped 14 percent this year.

The Australian currency fell 0.1 percent to trade at 75.72 cents at 6:35 a.m. in London.

Australia’s central bank has kept interest rates at a record low of 1.5 percent since August 2016 to spur growth. Employment rose less than forecast by economists in March, and the RBA has said it expects inflation to reach its 2-to-3 percent target only gradually.

Meanwhile, the Fed has indicated plans to raise rates twice more this year. The 10-year Treasury yield climbed above 3 percent last week for the first time in four years.

Treasury Yields

The U.S. yield advantage over Australia is set to widen, according to Moffitt, who predicts that the 10-year Treasury yield will reach 3.5 percent by the end of December. As a result, Australian longer-dated bonds will be less attractive, while the short-end can outperform the U.S., he said.

A level of 3.5 percent to 4 percent for Treasuries would lure pension funds and insurers into the U.S. market, he said.

“If yields rise and equity markets hold together, then pension funds and insurers may be attracted to that and try and neutralize their liabilities shortfalls,” he said. “We think there’s a quite a lot of money like that waiting to be deployed in the U.S.”

The debate on whether the current Treasury selloff will be more sustained than in February is dividing Wall Street, with Citigroup Inc. seeing a rally and calling for investors to go long. Losses two months back were contained by skittish equity markets.

The 10-year yield is tipped to rise to 3.14 percent in the fourth quarter, according to a median forecast of analysts surveyed by Bloomberg.

(Updates with views on Australian bonds in ninth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE