Talk Is Cheap, Say Aussie Bulls Shrugging Off RBA's Rhetoric

(Bloomberg) -- It will take more than just rhetoric to tame Australian dollar bulls as the currency hovers near a two-year high.

Unless the Reserve Bank’s willing to signal it’s ready to cut interest rates, anyone betting on the Aussie has little to fear, according to National Australia Bank Ltd. and Westpac Banking Corp. AMP Capital Investors Ltd.’s Nader Naeimi, who made the right bet buying the Aussie about eight months ago, said he will only switch to wagering against the currency if it climbs closer to 85 U.S. cents. Eaton Vance Corp. said the currency will probably approach that level if iron ore, the nation’s largest export, extends its rebound and the greenback goes on slumping.

Talk Is Cheap, Say Aussie Bulls Shrugging Off RBA's Rhetoric

The RBA warned Tuesday that a rising local dollar is set to subdue inflation and weigh down growth and employment. HSBC Holdings Plc is among those saying that was actually a fairly mild reaction, considering the Aussie has rallied about 4 cents since policy makers’ previous meeting in July.

“It was a quite a neutral statement,” said Naeimi, who heads a dynamic investment fund in Sydney at AMP Capital, which oversees $120 billion. “If the Australian dollar pushes up toward 85 cents, then that would get the RBA more concerned.”

He has started trimming his positions in the currency but won’t start shorting it until it gets to about 85 cents, a level last seen in November 2014.

The Aussie bought 79.44 cents at 2:14 p.m. in Sydney, after reaching a two-year high of 80.66 cents last week. The currency has surged more than 10 percent this year, hampering the central bank’s efforts to guide the economy’s transition to growth led by education and tourism instead of iron ore and coal. Governor Philip Lowe and his deputy, Guy Debelle, began to ramp up their rhetoric on the local dollar late last month.

The RBA maintained its forecast for the economy to expand around 3 percent in the next couple of years after leaving its benchmark rate at a record low of 1.5 percent. It will release its updated growth and inflation projections in its quarterly statement Friday. 

Swaps traders expect the RBA to hold rates through the first half of 2018, betting on a hike only in the latter part of the year. As a result, Australia’s bond yield premium over Treasuries will likely narrow as the Federal Reserve tightens policy, limiting the Aussie’s gains, Naeimi said.

“The near term risk is that the latest Aussie strength could extend to at least 82 cents,” said Rodrigo Catril, a currency strategist at National Australia Bank in Sydney. “But a revival in the U.S. dollar’s fortunes before year-end should bring the Aussie lower.”

Talk Is Cheap, Say Aussie Bulls Shrugging Off RBA's Rhetoric

Australia’s dollar is 16 percent overvalued, the most among Group-of-10 currencies after New Zealand’s, according to a measure of purchasing-power parity that takes into account consumer-price gains.

Leveraged funds raised their net Aussie long wagers about a week ago to the most since April 2016, according to the Washington-based Commodity Futures Trading Commission. That leaves the currency vulnerable should the U.S. dollar rebound or if there’s a spike in risk aversion, said Sean Callow, a senior currency strategist at Westpac in Sydney.

Westpac expects the Aussie to advance to as high as 81.50 U.S. cents, before retreating to the “high 70s.”

“Today doesn’t seem to be the day to call a high in the Aussie, with the RBA statement unthreatening,” Callow said Tuesday. “But big picture, we see the Aussie as stretched, well above fair value.”

Eaton Vance continues to favor a stronger Australian dollar, in particular against the kiwi as the bigger economy outperforms and leads the RBA to run a more hawkish policy than the Reserve Bank of New Zealand, said Eric Stein, Boston-based co-director of global fixed income at the firm. If the Australian economy slows and inflation is low though, the RBA will turn more dovish and will try to rein in the currency’s strength, he said.

“If terms of trade keep going up, they will be OK with a stronger Australian dollar,” Stein said. “They would be more concerned if there is a disconnect between the two.”