Macquarie Group Ltd., which has ousted Canada’s Desjardins Group as the world’s most accurate currency forecaster, is telling clients that its top picks for 2014 call for declines in Australia’s dollar and the yen.
Australia’s largest investment bank sees the Aussie sliding about 8 percent by Dec. 31 and the yen falling more than 5 percent as central banks in the two nations add to monetary stimulus that have sent their currencies to the lowest levels in at least three years.
The Bank of Japan has been buying 7 trillion yen ($67 billion) of bonds a month since April, while the Reserve Bank of Australia has turned to interest-rate cuts and warnings of currency-market intervention to weaken its local dollar and boost the economy.
“The BOJ is going to have to reassess and introduce more monetary stimulus,” David Forrester, a senior vice president for Group of 10 foreign-exchange strategy at Macquarie in Singapore, said by phone on Jan. 3. “Australia’s an expensive, uncompetitive place so a lower currency is needed. Above 90 cents, the Aussie squeezes the economy.”
Median estimates in Bloomberg strategist surveys agree with Macquarie that the yen will weaken to 110 per dollar by year-end, from 104.35 as of 7:51 a.m. in London. The analysts are more optimistic on Australia’s dollar, predicting it will slide to 87 U.S. cents, from 89.31 today, while Macquarie sees a decline to 82 cents by Dec. 31.
Macquarie was the most accurate forecaster of major currencies for the four quarters ending Dec. 31, data compiled by Bloomberg show. Canadian credit union Desjardins came in second, after taking the top spot in the third quarter.
The options market suggests there’s a 49 percent chance of the Sydney-based lender’s prediction on the Aussie coming true this year, while the odds of its yen forecast being realized are 59 percent.
The yen plunged 18 percent against the U.S. dollar in 2013, its biggest drop in 34 years, and depreciated to a more than five-year low of 105.44 on Jan. 2. Australia’s dollar fell 14 percent, the most since 2008, and traded as low as 88.21 U.S. cents in Dec. 18, its weakest level since August 2010.
The yen and Aussie were the worst performers among 16 major peers versus the greenback after South Africa’s rand last year, data compiled by Bloomberg show. The rand fell 19 percent before reaching a five-year low of 10.76 per dollar on Jan. 3.
BOJ policy makers increased their bond-purchase program in April as they sought to end more than 15 years of crippling deflation. More than half of the 37 economists polled by Bloomberg in November said the central bank will boost its stimulus efforts in the second quarter, which may further depreciate the yen.
Betting on further declines in Japan’s currency will be a “patience trade” until the BOJ steps in to bolster monetary easing measures, Macquarie’s Forrester said.
Any increase in Japan’s monetary stimulus may be all the more effective in weakening the yen as the U.S. Federal Reserve starts reducing its bond purchases from $85 billion a month.
“The yen will continue to fall,” Hendrix Vachon, an economist and currency strategist at Desjardins, said in a phone interview from Montreal yesterday. “Even if the drop will be lower than 2013, it may still be the biggest loser in 2014.”
Macquarie is more of a lone voice on the Aussie. Fellow Australian lender Westpac Banking Corp., ranked the sixth most-accurate forecaster, expects the local dollar to prove more resilient and end this year down less than 4 percent at 86 U.S. cents, according to analyst estimates compiled by Bloomberg.
“The market has become too downbeat on the outlook for the Aussie,” Robert Rennie, the global head of currency and commodity strategy at Westpac in Sydney, said in a Jan. 3 phone interview. After a 13 percent drop versus New Zealand’s dollar in 2013 and reaching a five-year low of NZ$1.0733 on Dec. 18, “sub-NZ$1.07, Aussie-kiwi looks to me fundamentally very cheap,” he said.
Reserve Bank of Australia Governor Glenn Stevens has favored a combination of rate cuts and warnings that he can intervene to push down the currency to boost competitiveness as Australia seeks to rebalance its economy away from mining. The central bank has lowered its main cash rate target by 2.25 percentage points since late 2011 to a record 2.5 percent.
The best forecasters in Bloomberg’s rankings were identified by averaging individual scores on margin of error, timing and directional accuracy across 13 currency pairs over the past four quarters. Firms had to be ranked in at least eight of the 13 pairs to qualify for the overall ranking, with 53 qualifying.
Macquarie had a score of 65.41, followed by Desjardins’s 64.91 and Germany’s LBBW at 62.97, data compiled by Bloomberg show. Macquarie jumped from fourth place in the third quarter.
Macquarie is the fifth-biggest Australian bank by market capitalization, and its $15.9 billion value is less than a quarter of National Australia Bank Ltd. at No. 4, data compiled by Bloomberg show. It began life in 1969 as a subsidiary of London-based Hill Samuel & Co. and was renamed in 1981 after Lachlan Macquarie, a former governor of New South Wales who introduced the state’s first domestic coins in 1813 -- the “holey dollar” -- after which the bank’s logo is stylized.
Macquarie predicts Canada’s dollar will continue last year’s 6.6 percent slide versus the greenback as its commodity-based economy, like Australia’s, suffers from high labor costs and weakening demand from China. Reports this month showed factory and services output growth are slowing in the Asian economy, the world’s second-biggest.
The loonie will depreciate 3 percent this year to C$1.10 per U.S. dollar, a level not seen since September 2009, according to Forrester.
“For the big investment booms we’ve seen in both Canada and Australia to reignite, you’d need China to perform massively to the upside,” he said. “China’s just not going to be the ‘wow,’ surprise-to-the-upside factor to get many investment projects back on the board.”