BlackRock Isn't Buying the Aussie's Rally

The Australian dollar is poised for its best month since October 2011 but the currency’s momentum isn’t strong enough to budge the world’s biggest fund manager.

BlackRock Inc.’s Sydney-based head of fixed income for Australia Stephen Miller -- who started avoiding the Aussie as it peaked in 2011 and picked its 2008 nadir -- is sticking with a bearish call he’s maintained for about three years. He sees the Aussie plunging at least 15 percent back past the seven-year low it hit in January. That contrasts with hedge funds and other large speculators whose bullish positions earlier in March reached the most in 18 months, with the currency gaining 6.5 percent since Feb. 29.

“The Aussie dollar is a volatile currency, it’s sometimes a case of five steps down and two steps up,” said Miller. “We’re in the two steps up phase and the next phase will be the five steps down phase.”

Miller is skeptical about signs that the local economy may have turned a corner after absorbing the shock of slumping mining investment and commodity prices. While gross domestic product recorded its fastest annual growth in about two years in 2015, consumer confidence has fallen in three of the past four months and median house prices in Sydney dropped in February by the most since at least 1990. Traders expect the central bank to lower its record-low benchmark interest rate over a year and only six of more than 50 economists predict the currency will gain from current levels by Dec. 31.

The Aussie was at 76.08 U.S. cents as of 5 p.m. in New York on Friday after reaching an eight-month high of 76.80. Its current level is significantly below the $1.1081 it peaked at in 2011 after plummeting over the past three years to touch 68.27 cents on Jan. 15.

Miller predicts the currency will fall to 65 cents and probably lower by the end of this year, more bearish that the median forecast for it to end 2016 at 70 cents.

Australia’s economy grew faster than forecast in the final three months of last year, prompting investors to pare bets on monetary easing and making the local currency one of the chief beneficiaries of recent weakness in the greenback.

The expansion in gross domestic product was driven by household spending and increased home building while employers added the most jobs on record in the final quarter as industries including tourism and education capitalized on a lower currency and weak wage growth.

For Miller, the trend in GDP growth for 2016 and beyond is probably close to 2 percent than to the 3 percent recorded last year. Activity will be curtailed by declines in capital spending and a softening in residential construction, which will eventually take a toll on housing turnover and consumer spending, he said.

Rate Cuts

Growth at that level “will open the door for rate cuts and, if it opens the door for rate cuts, that opens the door for a lower Aussie dollar,” he said. “Over time, albeit in a fairly volatile fashion, we’ll still get to the mid- to-low 60s level by the end of this year.”

Miller’s concerns are borne out in the swaps market, where traders are certain the central bank will lower its benchmark rate to 1.75 percent from an already record-low 2 percent over 12 months.

Currency traders have recently brushed these concerns aside, focusing instead on the higher yields on offer in Australia as central banks in Europe and Japan ease policy and the Federal Reserve appears reluctant to increase rates.

Net bullish futures bets on the Aussie dollar climbed to 29,195 in the week to March 8, the most since September 2014, data from the Commodity Futures Trading Commission show. They dropped to 12,782 a week later, in the run-up to the last Fed meeting.

Depreciation Needed

The currency can climb to 80 cents over three months because of the U.S.’s dovish policy stance, Macquarie Bank Ltd. said in a research report March 17. Those gains won’t last as the Australian economy needs a weaker currency to adjust to the end of a mining investment boom, wrote analysts led by Nizam Idris, Singapore-based head of foreign-exchange and fixed-income strategy.

“If it doesn’t happen naturally of its own accord, then the RBA still has enough ammunition to make it happen via rate cuts,” they wrote, predicting a move to 74 cents in six months.

The local dollar is likely to face pressure as signs should emerge that the U.S. economy is growing enough to generate inflation and allow the Fed to deliver higher interest rates, Miller said. Fed policy makers last week lowered their median rate projection to two increases by year-end from a forecast of four in December.

These forces will probably become visible to the market in the second half of the year, according to Miller, who said he holds a “core short position” in the Aussie.

“It’s a fairly modest position, awaiting confirmation that the sorts of views that we have are more likely to manifest themselves,” he said. “The finishing line might be longer than I think it is, but we will ultimately get there and a good marker at this point in time is to think about the end of the year.”