The Australian dollar declined to its lowest level in almost three years, as speculation the central bank will cut borrowing costs next week curbed demand for the currency.
One-year government yields fell to a record as traders’ expectations for interest-rate reductions over the next year climbed to the most in 12 weeks. Reserve Bank Governor Glenn Stevens said yesterday the inflation outlook provided room for policy easing. The Aussie extended a decline with the New Zealand dollar after reports showed U.S. companies boosted employment in July and the world’s biggest economy expanded more than analysts estimated in the second quarter.
Stevens’s comments “really left the door open for more easing, and those dovish signs give us more confidence in our view that the RBA will cut rates once again,” said Janu Chan, a Sydney-based economist at St. George Bank Ltd. “The Aussie will weaken from here,” said Chan, who sees the currency at 89 cents by year-end.
The Aussie fell 1.1% to 89.64 U.S. cents as of 1:37 p.m. London time, after earlier dropping to 89.43 cents, the weakest level since September 2010. It’s set for a 1.9% drop this month, the most after the Brazilian real among 16 major peers, in the longest string of losses since November 2008.
Australia’s one-year bond yield declined to an all-time low 2.25%, before trading at 2.28%. The rate on government debt due in two years touched 2.3%, the least in a year, while the three-year sovereign note yield reached 2.52%, the lowest since June 11.
Traders see a 92% chance of the RBA will lower the cash rate by 25 basis points to a record-low 2.5% at a meeting on Aug. 6, up from 75% odds seen a week ago, according to swaps data tracked by Bloomberg.
National Australia Bank Ltd. said it’s expecting two 25- basis-point reductions to the cash rate including a cut next week, sending the benchmark to 2.25% by Dec. 31. The bank previously predicted a 2.5% rate at year-end.
“Yesterday Glenn Stevens provided a much more sober and realistic outlook, suggesting that the economy cannot rely on housing and consumption to plug the growth hole,” Alan Oster, NAB’s Melbourne-based chief economist, wrote in a report today.
Stevens and his board will probably decrease rates by 56 basis points over the next 12 months, the biggest expected reduction since May 7, according to a Credit Suisse Group index based on swaps. That’s the largest cut seen among 10 developed- nation central banks tracked by the lender.
A gauge of manufacturing in China, Australia’s biggest trading partner and New Zealand’s second-largest export destination, probably fell to 49.8 in July from 50.1 in June, according to economists surveyed by Bloomberg News before tomorrow’s report. If confirmed, that would be the first reading below 50, the dividing line between expansion and contraction, since September.
The Australian dollar “has taken the brunt of this change in sentiment with respect to China,” Nick Verdi, a Singapore- based currency strategist at Barclays Plc, said in a Bloomberg Television interview. “In China, the government there and the central bank don’t really seem to be keen to support growth. They are comfortable with a lower trajectory.”
The Aussie dropped 12% in the past three months, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Its New Zealand counterpart had the second-biggest slide, falling 4.8%.
New Zealand’s kiwi dollar fell 0.5% to 79.48 U.S. cents after falling 1.2% in the previous two days. The nation’s two-year swap rate, a fixed payment made to receive floating rates that is sensitive to interest-rate expectations, rose three basis points to 3.35%.