By Candice Zachariahs April 6 (Bloomberg) — Investors are the most bullish in almost three years on the Australian dollar on bets the central bank will extend its steepest interest-rate increases since 2000. That contrasts with analysts who have cut forecasts on the currency for three months. Swaps traders are pricing a 52 percent chance that Reserve Bank Governor Glenn Stevens will raise the benchmark rate for a fifth time in six meetings today and a 78 percent chance it will be 5 percent by year-end. The world’s best-performing major currency in the past year also has further to go as commodity prices rise, say investors including AMP Capital and BlackRock Inc., the world’s biggest asset manager. “A very proactive RBA will drive yield differentials,” said Kurt Magnus , director of institutional foreign exchange at Westpac Banking Corp., the nation’s second-largest lender. “There is a real risk that the Australian dollar will trade at parity by June 30.” The currency has never reached parity with the U.S. dollar since it started trading freely in 1983. It has advanced against all of its 16 most-traded counterparts in the past year, strengthening 29 percent against the greenback. Fourteen of 23 economists in a Bloomberg News survey expect the RBA to increase rates to 4.25 percent from 4 percent at its meeting today. The median prediction for the Aussie’s level by June of this year fell to 90 U.S. cents in March, based on Bloomberg surveys of analysts, declining for a third month to the lowest since September 2009. ‘High Yielder’ Futures traders last month increased bets that the Australian dollar will gain against the greenback to the most since June 2007, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on an advance in the Aussie compared with those on a drop — so-called net longs — rose to 74,339 on March 23 in a fifth week of gains. The long position slipped to 69,340 as of March 30. “The real story is that Australia is a moderate yielder becoming a high yielder in a world where risk assets on a global basis are supported,” said Richard Benson , who oversees $14 billion of currency funds as an executive director in London at Millennium Asset Management. “If we have a stable to weaker U.S. dollar –typified by the Dollar Index — then Aussie is highly probable to trade through parity.” The Australian dollar is heading for a third monthly gain versus the greenback after policymakers raised the target rate by 1 percentage point over five meetings beginning Oct. 6 from a half-century low. That’s the most aggressive tightening since the Reserve Bank of Australia increased its benchmark 1.5 percentage points over seven meetings ending August 2000. ‘North of Neutral’ “It’s not wise to leave interest rates right down at rock bottom any longer than you need,” Stevens said in his first television interview since taking the helm of the RBA in 2006, broadcast by Channel Seven on March 29. House prices “are getting quite high,” he said, signaling rates may need to be increased further to contain inflation. “The RBA probably has to get north of neutral, so that means something like 5.5 percent by year-end is not out of the question,” said Stephen Miller , a managing director in Sydney at BlackRock, which oversees $3.2 trillion globally. BlackRock is “building” some long positions in the Aussie and prefers to bet on gains in the currency versus the euro and yen, he said. Currency options may “play a very large role in taking the Australian dollar through its old highs and then through parity very quickly,” versus the greenback, Westpac’s Magnus said. Digital Options Options market makers are short so-called digital options, and as the currency rises they “will have to buy Aussie aggressively to rehedge their positions,” he said. In digital options, sometimes referred to as binary options, the return is either a specific nominal amount or nothing, with the payoff depending on whether the underlying security trades above or below the so-called strike price. A bank that sold a digital call option would likely need to hedge against a payout by purchasing large amounts of the physical asset as the spot price approaches the strike price. AMP Capital, which manages $90 billion, is betting on gains in the Aussie dollar toward $1 on prospects Australia’s yield premium and higher prices for iron ore and other commodities will drive demand. Vale SA, a Brazilian company that’s the world’s largest iron ore producer, and Melbourne-based BHP Billiton Ltd. last month ended a 40-year system of setting annual prices by signing short-term contracts with Asian mills. Vale won a 90 percent increase. Trimmed Forecasts AMP Capital would add to its position if the Aussie increased above 92.50 cents, rising above its March high and breaking the top of the downtrend line that’s been in place since November, said Shane Oliver , Sydney-based head of investment strategy. The currency reached 94.06 cents on Nov. 16, the strongest since August 2008. Banks including JPMorgan Chase & Co, Commerzbank AG and Royal Bank of Scotland Plc have trimmed Aussie forecasts after predicting in December that it would reach parity this year. Estimates for where the currency will trade in the second quarter of 2010 rose every month from 82 U.S. cents last July to a peak of 95 cents in December, according to Bloomberg data. “We’re going to see better-than-expected data out of the U.S. for much of this year, and the dollar should generally do well,” said Greg Gibbs , a currency strategist at Royal Bank of Scotland in Sydney. “It remains a very important barrier, and the closer we get to $1 the Aussie seems to struggle.” National Australia Bank Ltd., Standard Chartered Plc, Canadian Imperial Bank of Commerce and HSBC Holdings Plc are among companies still forecasting the Aussie to reach $1 this year. Investors are betting improvements in retail sales, industrial production and employment will prompt the Federal Reserve to increase borrowing costs, boosting demand for the U.S. dollar. Futures show a 60 percent chance the Fed will raise its benchmark interest rate as early as November, compared with 45 percent odds a month ago. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
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Australian Dollar Lures AMP, BlackRock as Gain to Parity Looms on Yields
