Australia’s dollar will rebound by year-end on demand for the world’s highest-yielding AAA assets even if the Reserve Bank cuts interest rates to a record, according to the currency’s most-accurate forecasters.
The so-called Aussie will climb to $1.05 by Dec. 31, from $1.0268 at 12:54 p.m. in Sydney, according to Credit Agricole CIB, which had the lowest margin of error for the past six quarters as tracked by Bloomberg Rankings. Second-rated National Australia Bank Ltd., which has the weakest end-2012 projections among the top five forecasters, sees the local dollar at parity by Dec. 31. The median prediction from 44 analysts surveyed by Bloomberg News is for $1.02.
“The attraction to the Aussie dollar as a reserve currency remains fairly strong,” said Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy at Credit Agricole. “Given that market expectations for rates are already pretty dovish, I don’t think we’re going to see too much more of a negative impact on the Aussie.”
Hedge funds are the most bullish on the Aussie in almost 1 1/2 years, Chicago Mercantile Exchange data show, even as interest-rate swaps data compiled by Bloomberg indicate a better than 80 percent chance the RBA will cut its 3.25 percent overnight cash-rate target to a record 2.75 percent by Feb. 5. The Aussie rose 46 percent since the end of 2008, the biggest gain across more than 150 currencies, driven by a record mining boom and government-bond purchases by central banks from Brazil to Switzerland diversifying reserves. It averaged 79.34 U.S. cents in 2009 when the RBA reduced its benchmark to 3 percent, the lowest since exchange-rate controls ended in 1983.
Year-end forecasts from the top five strategists, which also include Monex Europe Ltd., Wells Fargo & Co. and Citigroup Inc., range from $1 to $1.06.
While Australia’s currency has declined from the post-float high of $1.1081 reached in July 2011 -- touching an almost one- month low yesterday of $1.0182 -- it’s still more than 35 percent above its average since being freely floated. The Aussie touched 95.82 U.S. cents on June 1, the lowest since Oct. 5, 2011 and one of just 23 days this year it was below parity. The currency first traded above $1 on Oct. 15, 2010.
Companies from Bluescope Steel Ltd. to surfwear maker Billabong International Ltd. and the Australian unit of Ford Motor Co. have been struggling to cope with the local dollar’s strength.
The RBA benchmark is still the highest among major developed economies even after the central bank lowered it by 1.5 percentage points over the past year. Policy rates for the U.S., the euro region, Japan and the U.K. -- the four central banks whose currencies are more traded than the Aussie -- range between zero and 0.75 percent.
Central Bank Buying
The Aussie’s strength has been sustained by as many as 23 national central banks that hold the currency, according to RBA data obtained Sept. 17 by Bloomberg News under the Freedom of Information Act. So-called net long positions that bet the local dollar will gain climbed to 89,562 in the period ended Sept. 25, the most since April 2011, according to data from the Commodity Futures Trading Commission in Washington. The figures reflect holdings in currency-futures contracts at the CME.
That’s helped reduce the risk of sudden price swings in the Australian dollar to the lowest in five years, options trading shows. Three-month implied volatility on the Aussie against the U.S. currency, derived from option premiums, slid to 8.65 percent on Sept. 14, the lowest since July 2007, and was at 9.25 today.
Foreign funds and central banks raised their stake Australian government bonds at the slowest pace since the second quarter of 2009, current-account data released last month show. The proportion of the securities held offshore declined to 77.5 percent from a peak of 79 percent in the first quarter, according to the data.
Demand for the South Pacific nation’s debt may have contributed to currency’s resilience, according to Ray Attrill, the Sydney-based global co-head of currency strategy at NAB.
Still, “this particular source of demand now looks to be largely behind us, meaning that we’re a bit more confident that the Aussie dollar should begin to trade somewhere closer to what we would consider its fair value to be,” Attrill said. NAB predicts the Aussie will slide to 99 U.S. cents by March 31.
Australia’s currency has fallen 5.4 percent from the 2012 high of $1.0856 reached on Feb. 29 as prices for key export iron ore tumbled 25 percent this year. Miners including BHP Billiton Ltd., Xstrata Plc and Fortescue Metals Group Ltd. (FMG) delayed some of the projects in a resources development pipeline the Australian government estimated in June at A$500 billion ($514 billion).
“The peak in resource investment is likely to occur next year,” RBA Governor Glenn Stevens said Oct. 2 after policy makers lowered the overnight cash rate target. “As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”
Stevens will probably cut interest rates again on Nov. 6, according to economists surveyed by Bloomberg News after this month’s reduction, in what would be his seventh-straight move on the day of the Melbourne Cup, Australia’s richest horse race.
Expectations for rate cuts have increased as reports in the past month showed the widest trade deficit in four years, weaker-than-expected retail sales and a decline in business confidence.
“Mining investment should add to economic growth next year, but by less than this year,” Paul Brennan, a Sydney-based senior economist at Citigroup, wrote in an e-mail on Oct. 3. “The economy therefore needs to rebalance with a pick up in non-mining sectors over the next few years. Lower rates will help this, but so would a lower Australian dollar.”
Citigroup, the fifth-best forecaster, sees the Aussie at $1.02 by Dec. 31 and 99 U.S. cents in the first quarter of 2013.
Declines in the currency as a result of interest-rate cuts may be limited because investors will continue to buy Australian government bonds, the highest-yielding AAA sovereign debt, according to Eimear Daly, a London-based currency-market analyst at Monex Europe, which ranked third in the Bloomberg Rankings and predicts the Aussie will be at $1.04 by the end of 2012.
“The RBA’s attempt to limit the Aussie’s strength will be in vain,” Daly wrote in an e-mail Oct. 3. “The Australian government is AAA rated and has low debt and primary deficit levels. Despite the slowdown, Australia’s bond and currency market will find willing investors.”
Australia’s 10-year yield was at 3.05 percent, almost double the average for top-rated peers. The country is one of 11 sovereign markets worldwide that hold the highest score from all three of the main credit-rating companies.
Yields on Australian corporate bonds averaged 4.43 percent yesterday, compared with 2.73 percent for global securities, Bank of America Merrill Lynch indexes show. The extra return investors demand to hold Australian company notes instead of government debt was at 195 yesterday, the least since Sept. 24.
The Markit iTraxx Australia index of credit-default swaps that gauges perceptions of corporate bond risk fell 2.3 basis points to 153 basis points as of 12:54 p.m. in Sydney, according to Markit Group Ltd.
Wells Fargo, the fourth-best forecaster, predicts the Aussie will end the year at $1.06, because of “the more positive global backdrop,” according to New York-based currency strategist Vassili Serebriakov.
Federal Reserve Chairman Ben S. Bernanke this week defended the U.S. central bank’s unprecedented bond buying announced last month, saying officials will sustain record stimulus even after domestic expansion gains strength.
The Fed said Sept. 13 it will keep the main interest rate near zero until at least mid-2015 and buy $40 billion of mortgage debt a month in a third round of quantitative easing.
The Bank of Japan, which concludes a two-day policy meeting today, increased its asset-purchase program by 10 trillion yen ($127 billion) to 55 trillion yen at the previous meeting on Sept. 19. European Central Bank President Mario Draghi said yesterday the bank is ready to start buying government bonds as part of a program to help ease borrowing costs for debt-ridden nations in the region.
The global economy will probably advance 2.6 percent in 2013 from a projected pace of 2.2 percent this year, according to the median estimate in a Bloomberg News survey of economists.
“Very accommodative monetary and liquidity conditions supported by the major central banks should be an important factor behind more positive market sentiment and stronger global growth momentum,” Serebriakov wrote in an e-mail Oct. 2.
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