Last Aussie Bull Capitulates as CBA Pares Rate Bets

Commonwealth Bank of Australia is losing faith in the ability of the local dollar to extend its world-beating gains this year.

Since April, CBA was alone among Australia’s big-four banks in predicting the Aussie would add to a rally that saw it jump 4.6 percent against the U.S. dollar in 2014, the most of 31 major currencies tracked by Bloomberg. Then, on Aug. 14, the nation’s biggest lender cut its year-end forecast to 94 U.S. cents, compared with 93.09 today and down from an earlier estimate of 97.

The change in sentiment shows how Australia’s economy is struggling amid decade-high joblessness, with CBA now saying policy makers may delay raising interest rates until 2015. The Reserve Bank of Australia has kept borrowing costs unchanged at a record-low this year as it seeks the right course amid the quickest inflation in 2 1/2 years and anemic growth.

“The rise in the unemployment rate” probably means “the RBA stays on hold a lot longer,” Richard Grace, CBA’s Sydney-based chief currency and interest-rate strategist, said in a phone interview on Aug. 15. “We still see Aussie dollar upside, just not as much as before.”

Rate Bets

The cut in the bank’s Aussie forecast brings it more in line with its three main peers, which yesterday reiterated their year-end estimates of 85 cents to 90 cents. The median prediction in a Bloomberg survey of more than 50 strategists puts it at 91 cents.

CBA sees policy makers raising their benchmark rate of 2.5 percent in February, after previously expecting a November increase. Swaps traders are even more pessimistic, with data compiled by Bloomberg indicating a better than 30 percent chance of a rate reduction by then.

Even without an increase, Australia has the highest main rate in the developed world after New Zealand’s 3.5 percent, making its currency attractive to international investors.

The Aussie has gained 6.1 percent this year versus a gauge of its major developed-nation peers, making it the best performer among the 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. It climbed to an eight-month high of 95.05 cents on July 1.

Gains Vulnerable

This year’s gains are looking vulnerable after the RBA cut its projections for the economy on Aug. 8. It now predicts gross domestic product growth of 2 percent to 3 percent in the year through June 2015, down from a forecast of 2.25 percent to 3.25 percent three months earlier. Inflation quickened to 3 percent in the second quarter, compared with a target of 2 percent to 3 percent.

Australia’s jobless rate jumped to a 12-year high of 6.4 percent in July, compared with a U.S. rate of 6.2 percent. A surge in resources investment that buoyed the economy through the global financial crisis is waning, just as projects funded by the boom come on stream, helping to depress prices and weigh on Australia’s trade balance.

“Next year is when we think there’ll be a more significant depreciation for the currency,” John Hopkinson, head of quantitative currency research at Bank of America Corp. in New York, said by phone on Aug. 15. “If there isn’t the demand for the minerals that they’re trying to export, then we’re going to see the terms of trade go very much against them.”

Bank of America sees the Aussie weakening to 88 U.S. cents by year-end, and even lower in 2015 as a resources glut takes hold, according to Hopkinson.

Outlook Comparisons

Westpac Banking Corp. is the most optimistic on the Aussie among the remaining big-four lenders, though it still predicts a decline to 90 cents by year-end. Australia & New Zealand Banking Group Ltd. forecasts a drop to 88 cents, with National Australia Bank Ltd. predicting 85.

Australia’s main rate compares with benchmarks of close to zero in the U.S., euro region and Japan.

That has helped put the Aussie in the top five investments this year for a strategy known as the carry trade, which exploits differences in global borrowing costs. These deals flourish when, as now, volatility is low and there’s less chance of price swings erasing the gains from the rate differential.

Morgan Stanley, which in June became the first major forecaster to predict the Aussie would reach parity with the greenback this year, is betting Australia’s currency will retain its appeal to investors.

Attractive Yield

“The Australian dollar still looks attractive from a yield perspective,” Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London, said yesterday by phone. “But that’s very much contingent on the fact that we maintain an attractive carry environment, that we see volatility remaining low, and yields elsewhere globally remaining low.”

Hedge funds and other large speculators trimmed bullish bets on Australia’s dollar for a second week in the period ending Aug. 12, according to data from the Commodity Futures Trading Commission in Washington.

The difference in the number of wagers on a gain in the Aussie compared with those on a decline -- net longs -- fell to 29,546 contracts, after reaching a more than one-year high of 39,743 in the week ending July 15.

Australia’s “investment boom” is fading, taking away “one of the pillars of support for the Aussie,” Robert Sinche, a global strategist at Stamford, Connecticut-based brokerage Pierpont Securities LLC, said by phone.

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