Investors are betting an Australian rate cut is a done deal after Reserve Bank Governor Glenn Stevens indicated the local dollar’s world-beating losses aren’t enough to bolster growth.
Traders see a 95 percent chance the RBA will cut the cash rate by a quarter-percentage point to 2.5 percent at an Aug. 6 meeting, up from 51 percent odds seen at the beginning of July, swaps data compiled by Bloomberg show. The central bank will probably drop the benchmark to 2.25 percent or lower by year-end, the data show.
“Stevens has pretty much told you that he’s cutting rates next week,” said Ray Attrill, the Sydney-based global co-head of currency strategy at National Australia Bank Ltd. (NAB) “We got the message that further currency depreciation doesn’t mean they need to be thinking about pulling interest-rate policy levers into reverse any time soon.”
The Aussie’s 12 percent slide in the past three months, the most among major developed currencies, isn’t enough for Stevens as he flagged further declines yesterday and said the inflation outlook allows for room to lower interest rates if required. Government bonds are rallying for the first time since April with investors expecting the RBA to make the world’s biggest rate reductions over the next year as unemployment rises and a housing recovery stumbles after the peak of a mining boom.
Australia’s two-year yield, among the most sensitive to interest-rate expectations, touched 2.30 percent, the least since July 2012. The 44 basis-point discount to the cash rate was the biggest since May 6, the day before the RBA cut the gauge to 2.75 percent, the lowest benchmark borrowing cost in the central bank’s 53-year history. The one-year note’s yield dropped to an all-time low of 2.25 percent.
The Aussie bought 90.36 U.S. cents as of 11:47 a.m. in Sydney, down 15 percent from a three-month high of $1.0582 on April 11. The world’s fifth-most traded currency reached 89.99 cents on July 12, the least since September 2010. The local dollar has weakened 9.7 percent in trade-weighted terms this year, heading for the biggest annual decline since 2008.
“It would not be a major surprise” if the Aussie depreciated further over time, Stevens said yesterday in a speech in Sydney.
“Swings in the exchange rate, we’ve had some quite big ones in recent years, and I think it’s unlikely that they’re going to derail us seriously on inflation,” Stevens said in a question-and-answer session after the speech. “I don’t think we’ll have too many dramas on that front, short of a very, very large depreciation.”
NAB said it’s expecting two 25-basis-point reductions to the cash rate including a cut next week, sending the benchmark to 2.25 percent by Dec. 31. The bank previously predicted a 2.5 percent rate at year-end.
“Yesterday Glenn Stevens provided a much more sober and realistic outlook, suggesting that the economy cannot rely on housing and consumption to plug the growth hole,” Alan Oster, NAB’s Melbourne-based chief economist, wrote in a report today.
The unemployment rate rose to 5.7 percent in June, the highest since 2009, while building approvals unexpectedly declined, according to government data. Consumer confidence slid in July and business conditions slumped in June, private reports showed this month.
Stevens and his board will reduce the RBA’s key rate by 56 basis points over the next year, the biggest cut seen since May 7 and the most among 10 developed-nation central banks tracked by Credit Suisse Group AG indexes based on swaps.
Prospects for further cuts are boosting the appeal of government bonds, which gained 0.7 percent this month as of July 30, according to Bank of America Merrill Lynch index data. Sovereign debt advanced after losing 1.8 percent over the previous two months, the data show.
The yield on notes due in a decade dropped six basis points this week to 3.71 percent.
“The Australian economy is still weak,” said Bin Gao, the head of interest-rate research for Asia and the Pacific at Bank of America Corp. in Hong Kong. “We’re bullish. The market will price in more cuts down the road.”
Ten-year yields will slide to 3.5 percent by the end of September, Gao said. That compares with the average forecast of 3.6 percent by economists surveyed by Bloomberg from July 11-16.
The Aussie will fall to 88 cents by June 2014, according to the median estimate of analysts polled by Bloomberg. That would take it to a level unseen since August 2010.
“Stevens is less confident than he was about the outlook for the economy, and clearly he would like the Aussie dollar to fall further,” said David Forrester, a Singapore-based senior vice president for Group of 10 foreign-exchange strategy at Macquarie Bank Ltd., in a phone interview yesterday. “The other important point is that he is saying last week’s inflation data hasn’t changed the easing bias. So we look for an RBA rate cut next week.”
Chart: WorldWideMarkets Flash Trader