Aussie Bulls Bolstered by Inflation Surprise: Australia Credit

Jan 22, 2014 9:17 pm ET

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Jan. 23 (Bloomberg) -- Bulls on the Australian dollar, the world’s worst-performing major currency in the past year, are predicting a rally after a surprise acceleration in inflation forced traders to slash bets on further interest-rate cuts.

The trimmed mean of core prices rose 2.6 percent in the three months through December from a year earlier, data showed yesterday, above the mid-point of the Reserve Bank of Australia’s 2 percent to 3 percent target range. Traders dropped the odds of a Feb. 4 rate cut to 5 percent from 17 percent and the Aussie gained 0.6 percent to 88.59 U.S. cents, as of 5 p.m. yesterday in Sydney.

RBA Governor Glenn Stevens must now weigh unexpectedly high price pressures against the worst unemployment in four years as he struggles to ignite an economy the central bank estimates grew in 2013 at the weakest pace in four years. Declines in mining investment and commodity prices spurred a 14 percent drop in the Aussie in the past year, the biggest decline among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes.

“The inflation number and the subsequent move in the Aussie show the risk of everyone thinking alike and positioned the same way,” said Nader Naeimi, the Sydney-based head of dynamic asset allocation at AMP Capital Investors, which manages $131 billion. “You could see not just an inflation surprise but also surprising growth numbers from Australia as global growth gains traction. The bearish Aussie sentiment has gone too far.”

Short Positions

Bets on declines in the Aussie last week remained near an almost four-month high reached Dec. 31, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in Australia’s dollar compared with those on a gain -- so-called net shorts -- was 51,988 on Jan. 14, compared with net shorts of 57,414 at the end of last year, the most since the week through Sept. 10.

Analysts lowered their Dec. 31, 2014, forecasts for the Aussie in three of the past four months, data compiled by Bloomberg show. The 5.6 percent cut since Oct. 1 is the steepest after the Canadian dollar among major developed peers.

Should short positions get forced out, the Aussie may trade toward 90 cents in coming weeks, if it can break above resistance at 89.15, Greg Matwejev, a Hong Kong-based director of currency hedge-fund sales at Newedge Group, said yesterday.

Buying Opportunity

AMP’s Naeimi, who said he’s a buyer of the currency, sees support for it at 85 cents and expects it to trade in a range of 85 to 95 cents over the next 12 to 18 months.

“There’s a tradeable buying opportunity in the Aussie dollar now,” he said. “It’s not a buy and hold.”

Reports this month painted a mixed picture for Australia’s economy as it moves away from mining-led growth.

Full-time jobs dropped last year by the most in more than two decades, according to a Jan. 16 report, while Australian Industry Group indexes released this month showed contractions in manufacturing and services industries.

Other figures indicated faster retail sales gains and a narrower-than-expected trade deficit. In 2013, the nation recorded the fastest increase in home prices in a calendar year since 2009, RP Data-Rismark said this month.

Yesterday’s inflation report showed the trimmed mean of core prices rising in the fourth quarter at the fastest year-on- year pace since 2011.

The stronger data ratifies RBA Governor Glenn Stevens’ view that the effects of 2.25 percentage points of interest-rate cuts over two years are working their way through the economy.

Rate Odds

“There had been further signs of the stimulatory effects of low interest rates, most notably in the housing market, and additional effects were still likely to be coming through,” according to minutes of the central bank’s Dec. 3 meeting, where officials kept the benchmark at a record-low 2.5 percent.

There was a 74 percent chance yesterday that the rate will be unchanged by the middle of this year, up from 60 percent odds seen following the jobs report on Jan. 16, interest-rate swaps data compiled by Bloomberg showed.

“We are seeing some signs of positive data and inflation has also picked up,” said Divya Devesh, a foreign-exchange analyst at Standard Chartered Plc in Singapore. “We expect the Australian economy to bottom out somewhere around the second half of the year.”

Trough Seen

Standard Chartered predicts the Aussie will trough at 86 cents by June 30 before rallying to 90 by the end of 2014, Devesh said. The median of forecasts compiled by Bloomberg is for it to trade at 87 cents by June 30 and 85 cents by Dec. 31.

Australia will grow 2.7 percent this year, before the pace of expansion accelerates to 3 percent in 2015, according to the median estimate of economists surveyed by Bloomberg. The RBA predicted in November that 2013 growth would be 2.25 percent.

The World Bank on Jan. 15 raised its global growth forecasts as the easing of austerity policies in advanced economies supports their recovery, boosting prospects for developing markets’ exports. The Washington-based lender sees the world economy expanding 3.2 percent this year, compared with a June projection of 3 percent and up from 2.4 percent in 2013.

“The market had probably started to price too high a risk of RBA easing this year,” said Adam Boyton, chief economist for Australia at Deutsche Bank AG in Sydney. “If we get some stronger domestic data now, I think that will help support the Aussie in forming a base.”

--Editors: Garfield Reynolds, Benjamin Purvis