Aussie seen plunging down amid RBA talk of intervention Traders are betting Australia's dollar will continue its largest retreat in five years as policy makers flag that intervention to decline the currency is an option, 30 years after they gave up exchange controls. Contracts giving the power to merchandise the Aussie versus the U.S. dollar have the highest premium over those allowing purchases since September. The bearish bets were at a four-year low last month. The Australian dollar’s 13 percent decline this year makes it the weakest mover after South Africa’s rand and Japan’s yen among 16 major currencies tracked by Bloomberg. While slouching commodity prices and mining investment are weighing on the Aussie, U.S. financial stimulus is acting as a brake on its sagged down, triggering Reserve Bank of Australia Governor Glenn Stevens to say this month he’s “open-minded” about intervention. The currency is 24 percent overvalued, according to an Organization for Economic Cooperation and Development measure that tracks buying-power parity. “You could argue that it’s somewhat expensive relative to fundamentals, as the RBA does, but like the RBA, my view is that those fundamentals will ultimately assert themselves,” Stephen Miller, a Sydney-based money manager at BlackRock Inc., which oversees $3.9 trillion, said in a November 26 phone interview. “I won’t be surprised to see” the Aussie in the “low 80s in a year’s time,” he said, compared with 90.92 U.S. cents as of 11:29 a.m. in New York. Traders Warned Stevens put currency traders on notice November 21 when he said that, while the benefits of intervention haven’t “so far” outweighed the costs, it “doesn’t mean we will always eschew” currency sales. “In fact we remain open-minded on the issue,” he told a forum of economists to mark next month’s 30th anniversary of the free float of Australia’s exchange rate. The nation’s dollar fell to a three-year low of 88.48 U.S. cents on August 5, from $1.0599 on January 10, as the central bank cut its main interest rate by a half-percentage point to a record 2.5 percent. There’s a better than 50 percent chance the RBA will reduce the rate further next year, BlackRock’s Miller said. of 31 economists surveyed by Bloomberg, 22 predict no change to borrowing costs by March. RBA ‘Jawboning’ The policy of allowing the Aussie to trade freely, which resulted in declines of about 20 percent in the wake of the Asian financial crisis of 1997 and the global slump of 2008, is partly responsible for Australia’s unparalleled record of more than 20 years without a recession. Australia’s dollar plunged 30 percent to 63.08 U.S. cents within 17 months of the December 1983 decision to scrap its peg versus a basket of peers to combat speculators betting on gains in the currency. Australia’s relatively high rate, which compares with a target of near zero in the U.S. and Japan, has ensured the nation attracts its share of the money printed by the Federal Reserve to finance its $85 billion of monthly bond purchases. The U.S. central bank will start reducing the stimulus program in March, according to a Bloomberg economist survey. “The market is uncertain and uncomfortable holding long positions in the Aussie at the moment,” Hugh Killen, the Sydney-based global head of foreign exchange at Westpac Banking Corp., said in a November 22 phone interview. “The tone of the Aussie is being set by the RBA’s jawboning and rates outlook, as well as the discussions around the Fed taper that are strengthening the U.S. dollar.” Bounce Due Australia’s dollar is probably due a bounce as it has fallen quickly over a short period and 90 cents is a “big level,” Marianne Winkelman, director of global bond, emerging market and currency trading at Loomis Sayles & Co., said in an e-mailed response to questions received today. “The RBA should be pleased with themselves,” Boston-based Winkelman said. “Aggressive FX intervention is unlikely and unnecessary at current Australian dollar levels. The bank’s verbal intervention had an impact, and they may not have spent a dime.” The Aussie gained as much as 0.8 percent today, snapping six days of declines and climbing from a three-month low, after data showed business investment unexpectedly grew, reducing pressure on the RBA to ease policy. U.S. monetary policy will remain stimulatory compared with Australia, even after bond purchases end, keeping the Aussie above its long-run average, Joseph Capurso, a Sydney-based strategist at Commonwealth Bank of Australia, said on Nov. 27. The Aussie is trading below its five-year average of 94.59 U.S. cents, data compiled by Bloomberg show. Bullish CBA CBA predicts the currency will strengthen to 92 U.S. cents by mid-2014. That makes the nation’s biggest lender more bullish than the median estimate of more than 30 strategists surveyed by Bloomberg, which puts the Aussie at 90 cents by June. Traders are paying the biggest premium among Group of 10 currencies for options betting the Aussie will weaken further, according to data compiled by Bloomberg on 25-delta risk-reversal rates. The premium on one-month contracts to sell the local dollar versus the U.S. currency over those allowing purchases increased to 1.78 percentage points, the highest since September 18. The premium rose from 0.47 percentage points on Oct. 22, the least since October 2009. A weaker currency will help make Australia more competitive as it seeks to end its dependence on mining development in the north and west of the country and boost industries including residential construction in the south and east. The Commodity Research Bureau’s U.S. Spot index fell 4.4 percent this year, the most since 2011. Aussie Overvalued Even after this year’s decline, the Aussie is the fourth most-overvalued of 15 major currencies, according to the OECD measure. Its peak level by this gauge came two years ago. Stevens’s ability to combat the Aussie’s strength through intervention was reinforced last month when the government pledged to inject A$8.8 billion ($8 billion) into the RBA’s reserve fund. The central bank may seek to convert at least A$5 billion of this into foreign currency, UBS AG said in a November 26 client note. “The key issue is definitely the unrelenting effort by the RBA to talk the currency down,” Callum Henderson, the Singapore-based global head of currency research at Standard Chartered Plc, said by phone November 26. “The bar for intervention is very high. It’s a useful potential threat to mention, but it becomes less useful if they actually do it. For the time being, they’ll focus on words.”
