Rates outlook pushes $A to lofty heights
Australian Financial Review, 1 November 2006
By Matthew Coghlan
Stubbornly high inflation, strong jobs numbers and near-universal expectations of an interest rate rise next week swept the Australian dollar almost US2.5¢ higher in October to above US77¢ for the first time in eight weeks.
The gain was the second-largest monthly rise this year. The $A fetched US76.95¢ yesterday, up from US74.54¢ at the start of the month and just shy of its US77.02¢ eight-week high reached on Monday.
On top of expectations for a rate rise next week, futures traders yesterday lifted the odds of another 25-basis point rate rise in March next year to a 56 per cent chance from a 50 per cent chance, after new credit data suggested the Reserve Bank of Australia's May and August rate rises had little impact on borrowing. Total credit rose by 1 per cent in September as expected, up from 0.9 per cent in August, with the annualised credit growth steady at 14.4 per cent.
"The RBA has said that it prefers annual credit growth at around 10 per cent," TD Securities chief strategist Steve Koukoulas said.
"Clearly, interest rates at 6 per cent are not stopping borrowers and lenders pumping money into the economy at a pace that is too strong."
The prospect of rising yields on $A-denominated investments helped attract foreign investors to the $A last month.
It also rose almost 2.5 per cent against the yen over the month to ¥90.41 yesterday. Last week, it peaked for the year at ¥90.80 - close to an eight-year high of ¥91.34 set late last year. Analysts attributed much of the $A's October gains against the yen to a revival of yen-funded carry trades - the popular investment strategy of borrowing yen at low interest to fund investments in higher-yielding currencies such as the $A. The Bank of Japan yesterday left interest rates on hold at 0.25 per cent but hinted at a rate rise in coming months.
The $A also benefited in October from takeover activity as foreign entities circled Australian companies, as well as from a rebound in metals prices over the month.
The growing optimism about the $A over the month pushed speculative $A long positions - which assume the $A will rise - to record levels last week.
But some analysts said those long positions would put a ceiling on $A gains above US77¢ and even risked sharp $A falls.
"From a speculative perspective, the market's reluctant to go chasing the $A at these levels because it's been burnt before," HiFX trading director Mike Hollows said.
"Each time we've seen these extraordinarily long $A positions, we've seen the $A fall between 2 and 3 per cent shortly after."
Bonds also experienced sharp movements last month, with the yield on three-year government bonds climbing from 5.77 per cent at the start of the month to a six-year high of 6.09 per cent late last week. Yesterday, that yield was at 6.03 per cent. Bond yields move inversely to bond prices and typically rise when interest rates look set to rise.