BlackRock Is Shorting the Australian Dollar

(Bloomberg) -- BlackRock Inc. is shorting the Australian dollar on a bet the central bank will cut interest rates to as low as 0.5% to revive the struggling economy.

The Aussie will extend recent declines and probably fall as low as 65 U.S. cents next year, said Craig Vardy, head of fixed income for Australia in Sydney at BlackRock, which oversees $6.52 trillion. The Reserve Bank of Australia will keep easing as the economy cools and U.S.-China tensions weigh on global growth, he said.

“I’ve no doubt that the RBA wouldn’t have an issue taking the cash rate below 1%,” Vardy said. The central bank wants to see lower unemployment and higher inflation, and is “probably willing to push a little harder to get some traction,” he said.

Australia’s dollar has tumbled 2.5% this year as U.S.-China trade frictions and signs global growth is slowing weigh on commodity currencies. The Aussie fell to 68.32 cents Tuesday, the weakest since the so-called currency flash crash on Jan. 3, before trading at 68.75 cents on Wednesday. The last time it was below 65 cents was in March 2009.

The currency has been out of favor this year as the RBA turned dovish and cut rates for the first time in three years. The central bank trimmed its cash rate by 25 basis points to 1.25% on June 4, with Governor Philip Lowe saying the decision would help reduce unemployment and boost inflation. Further easing is “more likely than not,” minutes released Tuesday showed.

The Aussie’s decline won’t necessarily be in a straight line, Vardy said. BlackRock sees the currency initially slipping to around 67 cents where it is likely to find some support before later falling to around 65 cents when the RBA cuts to 0.5%, he said.

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BlackRock isn’t alone in expecting the RBA to keep easing. Franklin Templeton Investments and JPMorgan Chase & Co. say Aussie bonds will rally as the RBA lowers its benchmark to 0.5%. Commonwealth Bank of Australia, the nation’s biggest lender, revised its RBA forecast on Tuesday to predict two more rate cuts this year, taking the key rate to 0.75%.

The RBA is likely to “stop and evaluate” the state of the economy after initially cutting rates to 0.75%, BlackRock’s Vardy said. Policy makers may then decide to cut again next year to ensure they’ve done enough to boost employment and support the economy. “We can definitely see an outcome where they get to 50 basis points,” he said.

Here are some of Vardy’s other investment views:

Fed Policy

• “A cut is likely. I think July is probably the month they’re looking, and will there be a follow up? I’d say likely yes”

Trade Tensions

• “It’s going to get worse before it gets better”
• Trump wants an improved balance of trade with China, but is he kind of playing the Fed off here as well, i.e. the more the rhetoric escalates, the more the Fed is kind of being brought to the table to cut rates?
• If Trump keeps amping up the trade rhetoric, does that mean the Fed has to go harder and cut rates? “It’s actually very difficult to know what is the end game here”

Inflation Shock

• “Probably the risk that everyone thinks has gone away is inflation. Break-evens just continue to get crushed globally. If you were to get an inflation spike, oil price rising, something like that, if you were to see some kind of shock there then it’s clearly a risk in the market that I think is being neglected”

Australian Housing Market

• “House prices and apartment prices are still way too high, so I think there will be an ongoing adjustment”
• “We’ve had a short-term boost to sentiment from the Liberal government re-elected. The issue here is really demand for credit. We can’t see that picking up in the near-term, despite the RBA cutting rates”

Emerging Markets

• “On the client side, we’ve had a lot more inquiries around emerging-market credit”
• “It’s about chasing yield offshore”
• “You have to be really, really selective about owning emerging markets but we think there’s some reasonably opportunities there”

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds, Liau Y-Sing

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