BlackRock shorting Aussie dollar, betting on extended slide

The Reserve Bank of Australia cut interest rates for the first time in three years earlier this month. It lowered its cash rate by 25 basis points to 1.25 per cent. PHOTO: AGENCE FRANCE-PRESSE
The Reserve Bank of Australia cut interest rates for the first time in three years earlier this month. It lowered its cash rate by 25 basis points to 1.25 per cent. PHOTO: AGENCE FRANCE-PRESSE

It is betting on central bank cutting interest rate to as low as 0.5% to revive economy

BlackRock is shorting the Australian dollar on a bet that the central bank will cut interest rates to as low as 0.5 per cent to revive the struggling economy.

The Aussie will extend this year's decline and probably fall as low as 65 US cents next year, said Sydney-based Mr Craig Vardy, head of fixed income for Australia at BlackRock, which oversees US$6.52 trillion (S$8.92 trillion).

The Reserve Bank of Australia (RBA) will keep easing as the country's economy cools and United States-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 per cent," added Mr Vardy.

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 about 3 per cent this year as US-China trade frictions and signs of global economic growth slowing weigh on commodity currencies.

The Aussie fell to 68.32 US cents in early London trading on Tuesday, the weakest since the so-called currency flash crash on Jan 3. The last time it was below 65 US cents was in March 2009.

The currency has been out of favour this year as the RBA turned dovish and cut interest rates for the first time in three years.

The central bank lowered its cash rate by 25 basis points to 1.25 per cent earlier this month, with Governor Philip Lowe saying the decision would help reduce unemployment and boost inflation.

Further easing is "more likely than not", according to minutes of the meeting released on Tuesday.

The Aussie's decline will not necessarily be in a straight line, said Mr Vardy. "If the RBA pushes rates down to 50 basis points, then maybe the Aussie gets through 67 US cents to 65 US cents, somewhere around there," he added.

BlackRock is not alone in expecting the RBA to keep easing. Franklin Templeton Investments and JPMorgan Chase said Aussie bonds will rally as the RBA lowers its benchmark to 0.5 per cent.

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 per cent.

The RBA is likely to "stop and evaluate" the state of the economy after initially cutting rates to 0.75 per cent, said Mr Vardy.

Policymakers may then decide to cut again next year to ensure they have done enough to boost employment and support the economy. "We can definitely see an outcome where they get to 50 basis points," Mr Vardy said.

Here are some of his other views:

FED POLICY

"A cut is likely. I think July is probably the month they're looking at, and will there be a follow-up? I'd say likely yes."

TRADE TENSIONS

"It's going to get worse before it gets better.

"US President Donald Trump wants an improved balance of trade with China, but is he kind of playing the Federal Reserve off here as well, that is the more the rhetoric escalates, the more the Fed is kind of being brought to the table to cut rates?

"If Mr 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 being e-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."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on June 20, 2019, with the headline 'BlackRock shorting Aussie dollar, betting on extended slide'. Print Edition | Subscribe