By James Ramage
The Australian dollar tumbled after muted inflation data
scotched investors' expectations that the central bank would raise
interest rates.
Investors had been buying the Australian dollar since late
January. The wager was that Australia's economy could weather a
slowdown in China, its biggest export market, and that the Reserve
Bank of Australia would become the second major central bank-after
New Zealand-to raise rates since the financial crisis. Higher
interest rates would support the Aussie by boosting returns on
assets denominated in the currency, attracting investors.
That support crumbled with the lower-than-expected inflation
figures released Wednesday. Consumer prices rose 2.9% in the first
quarter from a year earlier, compared with an average forecast for
a 3.2% increase. The Reserve Bank of Australia is widely seen as
unlikely to raise rates unless inflation is above its target range
of 2% to 3%.
The Australian dollar hit a two-week low after the report,
trading down 0.9% at $0.9285 late Wednesday in New York. The
currency was trading near a five-month high against the U.S. dollar
before the inflation data.
Some money managers and analysts say it will be hard for the
Aussie to keep climbing now that a rate increase is likely off the
table in the coming months. Many still harbor doubts about the
health of Australia's economy, particularly the mining sector,
which depends on demand from China. Without the incentive of higher
yields, Australia's currency and bonds may have a tougher time
attracting investors.
"We do think an important support was taken away from the
Australian dollar by the CPI number," said Roger Hallam, who helps
manages over $230 billion as currency chief investment officer of
global fixed income at J.P. Morgan Asset Management.
Mr. Hallam bought the Aussie in early March, during a stretch of
strong economic data, but exited those wagers earlier this month.
He said he doesn't have any exposure to the Australian dollar
currently, adding the currency could fall to $0.90 by the end of
the year.
Before Wednesday, investors had been warming to the Australian
dollar. Earlier this month they held a bullish position in Aussie
futures for the first time in almost a year, according to the
Commodity Futures Trading Commission.
The currency has been a popular bet off and on since the
financial crisis. Australia's economy, supported by commodity
exports, never entered recession during that period. The RBA was
one of the few central banks in the developed world not to cut
interest rates to near zero, making the Aussie attractive to
investors hunting for higher returns. Australia's central bank sets
its benchmark interest rate at 2.5%, compared with the U.S. Federal
Reserve's range of between zero and 0.25%.
But over the last year, the Aussie has suffered as Australia's
economy faced headwinds from slowing growth in China. Prices for
iron ore and coal, the country's two biggest exports, have fallen
amid fears of shrinking Chinese demand. The Australian dollar
traded at a 3½-year low in January.
More recently, the outlook has brightened. Australia has posted
a trade surplus for three straight months and the unemployment rate
has backed down from recent highs.
Some investors and analysts say improvement in Australia's
economy should continue to carry the Aussie higher, even without a
rate increase.
The Australian dollar "still offers attractive yields compared
with other currencies," said Kathy Lien, managing director of FX
strategy at BK Asset Management. "The yield story is in play. And
we're seeing improvements in Australia's economy."
Ms. Lien said she would consider buying the Australian dollar if
it fell to $0.9150, and sees it rising to $0.97 in the next six
months.
But a large number of bullish bets on the Aussie were centered
on interest rate expectations and had to be hastily unwound on
Wednesday, said Sebastien Galy, FX strategist at Société
Générale.
"Some were wrong-footed hoping for more" gains for the
Australian dollar, Mr. Galy said.
Write to James Ramage at james.ramage@wsj.com