The tendency for the Australian dollar to rise in step with U.S. bond yields has broken down and that signals more declines for the world’s worst-performing major currency.
The 60-day correlation between the Aussie dollar and Treasury yields was -0.42 last week, where a reading of -1 means the two move in opposite directions. That’s the strongest negative link since 2006 and follows a five-year period ending in June in which the assets tended to move together as the outlook for the global economy fluctuated.
Australia’s dollar probably won’t benefit from an improvement in U.S. growth and a stabilizing Chinese expansion as the South Pacific nation’s economy adjusts to a drop in record mining investment and commodity prices, according to National Australia Bank Ltd. The Aussie has weakened 5 percent in the past month, the worst performer among 10 developed nation peers tracked by Bloomberg Correlation Weighted Indexes. It’s on track for its worst annual decline since 1985.
“You can have a more positive view of global growth without that translating into a positive view of the Australian dollar if commodity prices remain under modest downward pressure,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “Stable U.S. bond yields and rising equity prices will be U.S. dollar supportive and that means the Aussie dollar is going down.”
Any improvement in global demand for commodities will be met by increased supply resulting from Australia’s recent investment boom, said Attrill, who predicts the currency will fall to 84 U.S. cents by Dec. 31, 2014. That’s more bearish than the median forecast for it to trade at 89 cents by the end of next year, according to data compiled by Bloomberg.
The value of mineral and energy projects being developed in Australia, the world’s biggest iron ore exporter, dropped 10 percent to about A$240 billion ($215 billion), the Bureau of Resources and Energy Economics said last month. A central bank index that tracks the prices of commodities important to Australia dropped 0.5 percent last month and is down 2.8 percent this year in U.S. dollar terms.
Treasurer Joe Hockey yesterday pledged spending cuts after forecasting the federal budget deficit will balloon to A$47 billion ($42 billion) this fiscal year from a previous estimate for a A$30.1 billion shortfall. The jobless rate will rise to a decade-high of 6 percent by July 1, the government said.
The Reserve Bank of Australia forecasts growth of 2.25 percent this year, the slowest in four years, and about 2.5 percent next year. It retained the option to cut benchmark rates from a record low if needed as it weighed an “uncomfortably high” currency against signs previous rate cuts were working, minutes of the bank’s last meeting released yesterday showed.
The Australian dollar bought 89.51 U.S. cents as of 5 p.m. yesterday in Sydney, down 14 percent since the end of 2012. The currency is presently trading about 18 percent above its average since exchange controls were scrapped three decades ago and its strength has crimped the competitiveness of Australian businesses, prompting RBA Governor Glenn Stevens to speak on several occasions about the central bank’s preference for a lower exchange rate.
“The drag from businesses’ resistance to investing and employing will eventually highlight the need for further cuts,” Bill Evans, chief economist at Westpac Banking Corp. wrote in a note to clients yesterday.
There is a 48 percent chance that the RBA’s benchmark rate will decline from a record-low 2.5 percent by the middle of 2014, according to swaps data compiled by Bloomberg.
Australia’s two-year bond yielded 2.61 percent yesterday after touching 2.57 percent on Dec. 16, the lowest since Sept. 30. The extra yield offered over U.S. debt fell to 2.27 percentage points on Dec. 16, the least since Sept. 30.
The 10-year rate was at 4.23 percent after touching a two-year high of 4.44 percent on Dec. 9. Comparable U.S. yields were at 2.86 percent. Australia’s benchmark will rise to 4.5 percent by the end of 2014, while the U.S.’s will reach 3.40, according to the median of forecasts compiled by Bloomberg.
U.S. policy makers will decide on Dec. 18 whether to dial back $85 billion in monthly bond purchases that have weighed on the nation’s currency. Thirty-four percent of economists surveyed by Bloomberg forecast a reduction.
“When we have global growth doing well the Australian dollar tends to outperform other G-10 currencies, but at the moment we are at a point for Australia were there are distinct domestic factors impacting the Aussie dollar,” said Patrick Bennett, a Hong Kong-based strategist at Canadian Imperial Bank of Commerce. “The currency has been overvalued for some time and now is facing a period when it’s likely to be modestly undervalued for a time as well.”
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