Gerard Satur’s MST Capital, which profited from weakness in the Australian dollar, is now hoping to gain from its resilience.
The Sydney-based hedge fund is betting the currency will surge versus the kiwi because New Zealand may end up with a lower benchmark interest rate than Australia’s this year. Satur said he closed a position that sought to profit from the Aussie’s decline against the U.S. dollar in January, when it tumbled to a seven-year low of 68.27 U.S. cents.
While the currency has gained 6.2 percent against the greenback and 3.3 percent against the kiwi this month, Satur says it has more scope to rally against New Zealand’s currency as that nation’s central bank cuts interest rates three more times this year amid a slump in dairy prices. Bets that the Reserve Bank of Australia will ease have been pared in the swaps market after the economy expanded more than expected in 2015.
“The RBA will only cut rates again this cycle if China has a major destabilization event,” said Satur, a former UBS Group AG trader. “We are short the kiwi versus the U.S. and Australian dollars — it’s our favorite short in currencies.”
The Aussie bought NZ$1.1196 as of 10 a.m. on Tuesday in Sydney, after reaching a six-month high of NZ$1.1319 on March 16. Against the greenback, the Australian currency traded at 75.81 U.S. cents after touching 76.80 cents at the end of last week, the strongest level since July 1.
The Aussie has shown resilience as the RBA held its key rate at a record-low 2 percent since May and the Federal Reserve last week scaled back its expectations for interest-rate increases this year to two, from four. Prices for iron ore, Australia’s biggest export earner, have also rebounded following three straight years of losses.
The Aussie’s rally versus the greenback “can potentially extend to 80 cents, but the majority of the move has probably occurred now,” Satur said. “We expect the Fed to raise rates twice this year, but the risk is to the upside.”
The RBA, which has cut rates by 2.75 percentage points since late 2011, is banking on improving consumer confidence to spur spending and encourage business spending as the nation grapples with the fallout from a collapse in mining investment. Policy makers reiterated this month that low inflation would provide scope to ease policy if necessary.
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The Aussie is likely to retreat to 70 U.S. cents by the third quarter, said Sean Callow, a senior foreign-exchange strategist in Sydney at Westpac Banking Corp.
“We expect a stronger U.S. dollar and some softening in commodity prices,” he said in an interview Monday with Bloomberg Television.
MST is betting against the New Zealand dollar after central bank Governor Graeme Wheeler unexpectedly cut the official cash rate by a quarter point to a record 2.25 percent this month and said further easing may be needed. Wheeler had reduced rates four times between June and December before pausing in January.
The Reserve Bank of New Zealand said in February a gauge of inflation expectations slumped to a 22-year low. Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, had also trimmed its forecast milk payment to New Zealand farmers to the lowest since 2007, putting more stress on rural cash flows and curbing the nation’s economic growth.
“New Zealand does not have the breadth of industry like Australia to take up the slack when parts of its economy such as dairy struggle,” Satur said. “Dairy prices can get lower as global supply increases and competition becomes more fierce.”
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