BT Investment Management’s Vimal Gor runs one of the consistently best performing Australian bond funds and his bold calls on interest rate markets are always worth listening to. His view for some time has been that Australian cash rates will move to 1.50% or lower on the back of a weak global economy and a slow transition from Australia’s recent mining boom. In an interview this week he has added another reason why he thinks cash rates will fall further; the Australian dollar.
The Aussie dollar has been a strong performer this year and in the global currency wars, where central banks are cutting rates in order to stimulate economic growth and exports, Australia has been quietly watching as other central banks continue to cut interest rates. This has made Australian bonds very attractive to international investors and put upward pressure on the Australian dollar. When you think that the 10 year bond rate in Japan is around -0.10% and in Germany around 0.18%, a AAA-rated government bond in Australia returns an attractive 2.60%.
The Australian dollar according to Mr Gor could soon move towards US$0.80 and this will likely force the RBA’s hand to cut the cash rate. “We’re just sitting here on a slow glide path lower in terms of growth; unfortunately at the same time the currency’s appreciating, which exacerbates the slowdown,” said Mr Gor in an interview this week. “By not lowering interest rates, you hold the currency up higher than it ultimately would be. I’m pretty sure the RBA would rather the currency wasn’t 10 percent overvalued.”
Markets are pricing in one 25bps rate cut as a near-certainty with the most recent data suggesting the likelihood of a cash rate cut by March 2017 is around 92%. A cut by November 2016 is priced as an 80% chance.
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