RBA's optimism on inflation expected to buoy the Aussie
The Aussie rose against the yen after minutes of the Reserve Bank's March 5 meeting said there were signs the economy was responding to low interest rates. New Zealand's currency slid against most major peers after Finance Minister Bill English said the currency was overvalued and he expects interest rates to stay lower for longer.
"The deputy governor is sounding the victory bell on inflation in the mining boom," said Andrew Salter, a currency strategist at ANZ.
"We managed to come through the boom without an excessively high level of inflation. It's hard to see a long-term short position in the Australian dollar bearing any fruit."
The Australian currency slid 0.2 per cent to US103.85¢, after touching US104.15¢ on March 15. That was its highest since February 5.
The Aussie added 0.2 per cent to ¥99.24. New Zealand's kiwi weakened 0.1 per cent to US82.56¢.
Dr Lowe said a stronger currency and higher savings rate had helped contain inflation and allowed lower interest rates even as the mining industry boomed.
"These factors have helped Australia to digest a huge investment boom without generating substantial imbalances in the economy," he said.
"The market will certainly interpret the comments in a positive light," said ANZ's Mr Salter.
"They will encourage the market to continue pricing in a normalisation of policy in Australia."
ANZ expects the RBA to hold benchmark borrowing costs unchanged in April.
Interest-rate swaps data indicate a mere 13 per cent chance the RBA will cut the benchmark rate at the next meeting on April 2.
Australian bonds retreated as US stock futures and Asian shares rallied.
The three-year bond yield rose 8 basis points, or 0.08 percentage points, to 3.02 per cent from Monday, when it dropped 17 basis points.
The 10-year rate climbed 8 basis points to 3.56 per cent.
Standard & Poor's 500 Index futures rose 0.1 per cent, while the MSCI Asia Pacific Index advanced 0.6 per cent.
Australia's bond market was benefiting from strong international demand for assets in the nation's currency, RBA assistant governor Guy Debelle said.
The Aussie has gained 2.3 per cent in the past six months, according to Bloomberg Correlation-Weighted Indexes. Its New Zealand counterpart has risen 3.1 per cent in the same period.
Demand for the kiwi was hampered after the Finance Minister said the currency was overvalued and could reverse course.
"There may be a correction in valuation with the exchange rate when the US economy is clearly picking up, and there are signs of that now," Mr English said in an interview in Hong Kong. The strength in the currency is "driven to a large extent by quantitative easing".
Mr English's words "add to some of the bearish tone we've seen around the New Zealand dollar", said Jonathan Cavenagh, a Westpac currency strategist in Singapore.
"I still think the currency is going to be pretty well supported on dips."
South Korea's won snapped its longest run of losses in almost five years while the Malaysian ringgit strengthened against the dollar.
Meanwhile, emerging-market stocks rose on overseas markets for the first time in seven days as concern about Europe's debt crisis eased and the lowest valuations in three months lured investors.
Japan's Samsung Electronics, which relies on Europe for at least 17 per cent of sales, advanced the most in a month in Seoul after falling 2.4 per cent on Monday.
Haier Electronics Group jumped 4.6 per cent in Hong Kong after profit gains.
The MSCI Emerging Markets Index climbed 0.3 per cent to 1033.59 in afternoon trading in Hong Kong, halting a six-day, 3.4 per cent slump.
Indian stocks also rose before the central bank meets to review monetary policy.
Frequently Asked Questions about this Article…
Philip Lowe defended a higher exchange rate and stronger savings, saying they helped stabilise the economy and contain inflation. Markets took his comments positively, helping lift the Aussie (which recently traded near five-week highs and touched around US104.15¢) as investors priced in a potential normalisation of policy.
The article explains that a stronger currency and higher household savings have helped keep inflation under control even during the mining boom. Analysts say those factors make it harder to justify a long-term short position in the Aussie, so optimism about falling inflation tends to support the Australian dollar.
According to the article, ANZ expects the RBA to hold benchmark borrowing costs unchanged in April. Interest-rate swaps data showed only about a 13% chance the RBA would cut the cash rate at the next meeting on April 2, indicating markets largely expect no immediate rate cut.
Australian bonds retraced as US stock futures and Asian shares rallied: the three-year yield rose 8 basis points to 3.02% and the 10-year climbed 8 basis points to 3.56%. RBA assistant governor Guy Debelle noted strong international demand for Australian currency assets, which is an important dynamic investors watch because bond yields affect borrowing costs, income from fixed-income investments and overall market sentiment.
The Aussie gained about 2.3% over the past six months (per Bloomberg indexes) and recently traded around US103.85¢ after touching US104.15¢. The New Zealand dollar was weaker in the short term—down about 0.1% to US82.56¢—though it had risen roughly 3.1% over the same six-month period.
Bill English said the New Zealand currency was overvalued and he expects interest rates to stay lower for longer, adding that the currency's strength was largely driven by quantitative easing. His comments worsened sentiment toward the kiwi and contributed to some of the bearish tone around the New Zealand dollar.
US S&P 500 futures rose about 0.1% and the MSCI Asia Pacific Index advanced around 0.6%. Emerging-market stocks climbed too—the MSCI Emerging Markets Index rose 0.3% to 1,033.59, ending a six-day slump—as easing concerns over Europe’s debt crisis and low valuations attracted buyers. Individual movers cited in the article included Samsung Electronics and Haier Electronics.
Based on the article, investors should note that RBA commentary highlighting a stronger currency and higher savings can support the Aussie and reduce near-term inflation risk. Markets are pricing a low probability of an imminent RBA rate cut, bond yields have risen with stronger global risk appetite, and international demand is helping Australia’s bond market. These are factors investors can watch when assessing currency exposure, fixed-income positions and interest-rate sensitivity in their portfolios.
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