Aussie Near Two-Month Low on Fed as IMF Sees Currency Overvalue

Australia’s dollar approached a two-month low on concern the Federal Reserve will curb stimulus that has propped up asset prices worldwide, undermining the attractiveness of the currency as a higher-yielding asset.

The Aussie dropped yesterday by the most in three months after minutes of Fed officials’ last meeting showed $85 billion of monthly bond purchases might be reduced in coming months. The negative correlation between U.S. Treasury yields and the South Pacific nation’s currency has fallen to a seven-year low, signaling they are more likely to move in opposing directions. The International Monetary Fund said Australia’s currency “looks overvalued by around 10 percent.”

The Aussie retreated 0.1 percent to 93.26 U.S. cents as of 11:43 a.m. in Sydney after slumping 1.1 percent yesterday, the most since Aug. 21. It touched 92.69 on Nov. 12, the weakest since Sept. 16. New Zealand’s kiwi dollar fell 0.1 percent to 82.66 U.S. cents following a 1.2 percent tumble, the biggest since Oct. 23.

The 120-day correlation between the Aussie and the benchmark U.S. 10-year Treasury yield was minus 0.36. It fell to minus 0.38 last month, the lowest since December 2006, from as high as 0.68 in November 2011.

Fed policy makers “generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released yesterday in Washington.

The U.S. yield touched 2.81 percent, a level unseen since Sept. 18. The yield on Australia’s 10-year government note added six basis points, or 0.06 percentage point, to 4.32 percent, the highest since March 2012.

(Source: Bloomberg)