Australia’s dollar will fall below $1 this year as a slowing economy and less Federal Reserve bond buying narrow the nation’s yield advantage, according to the currency’s most-accurate forecaster.
The so-called Aussie will weaken to 99 U.S. cents by Dec. 31, from $1.0484 as of 12:24 p.m. in Sydney, according to Bank of New Zealand, which had the lowest margin of error at 2.69 percent in the past six quarters as tracked by Bloomberg Rankings. The lender is a unit of Melbourne-based National Australia Bank Ltd.
Ten-year yields are near a seven-week low relative to U.S. Treasuries with swap-market traders betting the Reserve Bank of Australia will cut its 3 percent overnight cash-rate target to a record by March to help the economy as resources investment slows. Minutes from the Fed’s December meeting showed officials see a probable 2013 end to $85 billion a month of bond purchases that have weakened the greenback.
“Aussie weakness is more a function of the U.S. dollar finding its feet, more so than it being subject to specific weakness of its own,” said Ray Attrill, the Sydney-based global co-head of currency strategy at NAB. Still, economic “weakness has become more broad-based in Australia,” he added.
The Aussie’s top five forecasters are divided on the currency’s path for this year, as demand stemming from the South Pacific nation’s rank as one of only seven with stable AAA credit ratings remains a key source of support.
Along with NAB, fourth-rated Canadian Imperial Bank of Commerce sees the Aussie at 99 cents by year end, while second- ranked Monex Europe Ltd. predicts it will be at $1. Wells Fargo & Co., the No. 3 forecaster, estimates the Australian dollar will rise to $1.07 by Dec. 31, while No. 5 TD Securities Inc. sees it at $1.02. The median estimate from 44 analysts surveyed by Bloomberg News is for $1.04.
The Australian dollar rose 1.8 percent in 2012 to $1.0394, beating strategists’ forecast it would decline to $1.01. That advance followed a 45 percent jump over the previous three years.
It touched 95.82 U.S. cents on June 1, the lowest since Oct. 5, 2011 and one of just 28 days in 2012 it was below parity. The currency first traded above $1 on Oct. 15, 2010.
Currency traders estimate a 33 percent chance the Aussie will be below $1 at year-end, data compiled by Bloomberg show. The difference in the number of wagers on an advance in the local dollar compared with those on a drop -- so-called net longs -- was 79,522 in the period through Jan. 1, figures from the Washington-based Commodity Futures Trading Commission show. That’s down from a record 103,376 in the week ended Dec. 17.
“Recent data confirm that the peak in resource investment is approaching,” RBA Governor Glenn Stevens said in a statement on Dec. 4, when he lowered borrowing costs for the sixth time in 14 months. BHP Billiton Ltd. (BHP), the world’s biggest miner, shelved three major projects in August estimated by Deutsche Bank AG to cost a combined $68 billion to build.
The Melbourne-based resources company said in October it will cut jobs at its Nickel West operations in Western Australia. Rio Tinto Group, the world’s second-biggest mining company, said in November it plans to cut $5 billion in operating and support costs by the end of 2014.
At the same time, Australia’s non-mining economy has been showing signs of a slowdown. Economic reports last month indicated the weakest growth in three quarters, a smaller-than- expected increase in home-loan approvals and the biggest consumer confidence slump in nine months.
“The rest of the Australian economy won’t be able to offset the slowdown in the mining sector,” said Eimear Daly, a London-based currency-market analyst at Monex Europe. “Australia’s growth will continue to slow.”
Analysts predict the South Pacific nation’s gross domestic product will grow 2.7 percent this year, the weakest pace in two years, according to a Bloomberg News survey. Group of 10 currency economies will probably expand 1.2 percent, while global GDP will rise 2.4 percent, separate polls show.
The Australian dollar has withstood expectations for a slump to trade more than 38 percent above its average since being freely floated in 1983. Its strength “keeps the pressure on the RBA to act,” said NAB’s Attrill.
Interest-rate swaps data compiled by Bloomberg show traders see a 78 percent chance the RBA will cut the cash rate to 2.75 percent or lower by June. Attrill sees the benchmark bottoming this year at a range of 2.25 percent to 2.75 percent.
Meanwhile, investors are betting on reduced stimulus from the U.S. central bank, as board members signaled the conclusion of its asset purchases some time this year. That comes as reports in the past month showed a recovery in the U.S. labor market, manufacturing and housing.
Recent data also indicated signs of a pickup in China, Australia’s largest trading partner. Government figures last week showed factory output expanded for a third-straight period in December and matched the fastest pace in seven months.
“Stronger Chinese growth and stable-to-stronger financial markets will help globally,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. “But subdued local Australian fundamentals will limit the extent of the currency’s advance.”
The combination of Australia’s top rating and its benchmark borrowing cost, which is the highest among major developed economies, will be the “main driver” of the Aussie dollar’s resilience, Annette Beacher, Singapore-based head of Asia- Pacific research at TD Securities, wrote in an e-mail Jan. 4.
The nation is one of only seven with a stable AAA score from all three main credit-rating companies, driving global demand for the Aussie. The International Monetary Fund plans to classify it in a category that includes the U.S. dollar and Japanese yen. As many as 26 central banks including those in Brazil, Russia and Germany hold the currency, according to data compiled by the RBA and Bloomberg.
The appetite for Australia’s assets spurred a decline in yields that sent the 10-year rate to a record low of 2.698 percent in June. While the nation’s benchmark yield remains the highest among its top-rated peers, the premium it offers over the average for 10 other AAA countries fell to 177 basis points today from the 2012 high of 226 basis points.
The spread to Treasuries was 155 basis points. It touched 145 on Jan. 3, the narrowest gap since Nov. 15.
There may be “continued broad-based demand to add to Australian dollar holdings over the medium to long term,” Jeremy Stretch, CIBC’s London-based head of foreign-exchange strategy, wrote in a Jan. 3 e-mail. “Slower growth may limit immediate demand, while the diminishing yield advantage will also act to constrain inflows in 2013.”
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