Bloomberg News

Aussie Rises After RBA Cuts Rate Less Than Swaps Suggest

June 05, 2012

Australia’s dollar climbed versus all of its 16 major counterparts after the Reserve Bank lowered borrowing costs less than swap rates had indicated.

The so-called Aussie gained after the central bank cut the overnight cash-rate target by 25 basis points, or 0.25 percentage point, to 3.5 percent. Swaps data compiled by Bloomberg had shown a more than 40 percent chance of a reduction to 3.25 percent before the Reserve Bank of Australia made its announcement today. The New Zealand dollar advanced as Asian stocks rose, boosting demand for higher-yielding assets.

“The market expected slightly more than 25, and the RBA cut only 25, so I think it’s caused short-covering,” said Roy Teo, a currency strategist in Singapore at ABN Amro Private Bank, referring to the scale of reduction anticipated by investors. “For the short term, I’d start to be positioned for some buying in anticipation of a relief rally” for the Australian dollar.

The Aussie climbed 0.7 percent to 98 U.S. cents as of 4:07 p.m. in Sydney. It slid to an eight-month low of 95.82 last week. The New Zealand dollar added 0.4 percent to 75.94 U.S. cents.

Australia’s bonds fell, with the benchmark three-year yield gaining 24 basis points to 2.19 percent.

The MSCI Asia Pacific Index (MXAP) of stocks advanced 1.5 percent, rallying from a four-day slide.

Economists were divided in their predictions before today’s RBA decision. Of the 27 surveyed by Bloomberg News, 13 expected a 25 basis-point cut, four predicted a 50 basis-point reduction and 10 estimated the central bank would leave rates unchanged.

Modest Growth

“With modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy,” the RBA said in a statement.

A private report today showed that Australia’s services industry shrank for a fourth month. The performance of services index was 43.5 last month, below the 50 level that is the dividing line between expansion and contraction, according to a report from Commonwealth Bank of Australia and the Australian Industry Group. It was at 39.6 in April.

The Reserve Bank of New Zealand, scheduled to hold a policy meeting on June 14, held its target rate at 2.5 percent in April.

Rate Parity

“Markets are now pricing in Australian-N.Z. cash rate parity by the beginning of 2013,” analysts at ANZ National Bank Ltd., led by Chief Economist Cameron Bagrie, wrote in a research note today. “Were this scenario, or one similar to it, to develop, it would dampen the yield advantage the Australian dollar has” over the New Zealand currency.

The Aussie rose 0.4 percent to NZ$1.2907 today. It touched NZ$1.2816 on June 1, the weakest since May 15.

Futures traders increased their bets that the Australian dollar will weaken against the U.S. currency, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the Australian dollar compared with those on a gain was 35,527 on May 29, the most on record going back to 1993.

“The Australian dollar is very close to being oversold,” Kurt Magnus, executive director of foreign-exchange sales in Sydney at Nomura Holdings Inc., Japan’s biggest brokerage, said before the RBA announcement. “The risks of positive news and its effect on the currency are increasingly growing.”

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net


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