Goldman Fund Manager Shorts Aussie to Defy Bets on RBA Rate Hike

(Bloomberg) -- Goldman Sachs Asset Management is calling the top of the Aussie rally, selling the currency after it jumped to a two-year high on what the firm sees as unrealistically strong expectations for interest-rate increases by the central bank.

With the Reserve Bank of Australia meeting next Tuesday, the manager of more than $1 trillion in assets is bearish on the Aussie after its rally made the currency expensive relative to those of its trading partners, including in Asia and Europe, said Philip Moffitt, the firm's Asia-Pacific head of fixed income. The local dollar's surge above 80 U.S. cents reduces the odds for RBA hawkishness, because it's likely to hurt growth and keep inflation below the bottom of the central bank's target of 2 percent to 3 percent, he said.

“For small open economies like Australia, where a strong currency is actually a big growth headwind, currency strengthening makes the prospect of any monetary-policy response quite remote,” Moffitt said in an interview by phone. “We'd be looking to take advantage of that.”

The currency has advanced 6.1 percent on a trade-weighted basis this year to the highest level since December 2014. The Aussie reached a two-year high of 80.66 cents Thursday as swaps traders saw almost even odds the RBA will tighten by May, despite top central bank officials signaling they are comfortable keeping the benchmark rate at a record-low 1.5 percent.

Fed Is Key

The Federal Reserve's acknowledgment this this week that inflation remained softer than it expected also prompted investors to rethink the path for U.S. rates, weighing down the greenback.

“The real story is a weak U.S. dollar,” Moffitt said. “That's the main component of it. The secondary component is this false expectation that the RBA might be about to start a rate-hiking cycle.”

The RBA will likely reiterate it isn't obliged to begin tightening together with others when they decide on policy Tuesday, Moffitt said.

Read more: RBA governor comfortable with current rates.

“If the currency is around 80 cents, that will be a significant topic of conversation,” he said. “We don't expect any move in rates until at least the second half of next year.”

The Aussie was at 79.67 cents at 1:31 p.m. in Sydney Friday. Any further advance may even spur the RBA to shift toward a dovish stance, Moffitt said.

“If the Aussie goes up substantially, it brings a rate cut back onto the table, which is something the RBA doesn't want to do,” he said. “But if there's no other way to control the currency, they might be forced to at least consider.”

Goldman Sachs Asset Management is also adding to wagers for a stronger U.S. dollar and higher Treasury yields as the market is underpricing the strength of that economy and pace of rate increases by the Fed, he said. The U.S. is predicted to report Friday that growth picked up to 2.7 percent last quarter from 1.4 percent in the first three months of 2017.

“We wouldn't be giving up on a strong dollar and we wouldn't expect bond yields to stay as low as they are,” Moffitt said. “Inflation will slowly rise and the Fed will be quite aggressive in rate hikes.”

The Fed is likely to raise rates just one more time this year, the manager said, paring his earlier prediction for two more moves. Still, there will be a continuous process of tightening next year, he said.

Australia's bond yield premium over Treasuries is likely to narrow again as Fed and RBA rates diverge, Moffitt said.

“It's an opportunity to be selling Aussie,” he said. “But the hard part of doing that trade is the Aussie side looks reasonably straightforward; the U.S. side is not as straightforward.”

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Garfield Reynolds, Christopher Anstey