The rout in Australia’s dollar that has sent the currency tumbling to a four-year low is far from over after the nation’s economy unexpectedly slowed.
That’s the conclusion of a growing number of international investors ranging from BlackRock Inc., the world’s largest money manager, to London-based Insight Investment Management Ltd. The Aussie slid to as low as 83.56 U.S. cents today, down from this year’s high of 95.05 in July, with BlackRock predicting it will reach 80 in nine months. Insight plans to add to trades that would profit from a drop of the currency.
The Reserve Bank of Australia has said at every meeting this year that a lower exchange rate would be helpful for the economy given the decline in the price of the commodities that account for more than half of the nation’s exports. The Aussie’s 5.8 percent slide in 2014 pales in comparison with the almost 50 percent slump in iron ore, which accounts for more than $1 out of every $5 of export income.
“The Aussie is overvalued relative to where everything is priced currently, importantly commodities and yield spreads,” Paul Lambert, head of currencies in London at Insight, a Bank of New York Mellon Corp. unit, said in a phone interview on Dec. 2. “We expect the spread between U.S. and Australian government bonds to narrow.”
Australia’s economic growth cooled to 0.3 percent in the third quarter, the Bureau of Statistics said yesterday, less than half the 0.7 percent pace predicted by economists surveyed by Bloomberg. The jobless rate has climbed to an 11-year high as the economy struggles to cope with the end of a once-in-a-century resources boom and a slowdown in China, which buys more than 35 percent of Australia’s overseas shipments.
The Australian dollar fell 0.1 percent today to 83.97 U.S. cents as of 12:26 p.m. in New York, sliding for a sixth day. The Bloomberg Commodities Index has slumped 11 percent this year, heading for a fourth annual decline.
Rate-swaps traders have priced in a 96 percent chance the RBA will reduce borrowing costs within 12 months, according to data compiled by Credit Suisse Group AG. The central bank has kept its key interest rate at a record-low 2.5 percent since August 2013. It had cut the overnight cash rate target by 2.25 percentage points over the previous two years to assist the economy.
Deutsche Bank AG, Goldman Sachs Group Inc. and Westpac Banking Corp. predict the RBA will trim its benchmark to 2 percent next year as unemployment increases and the housing market loses momentum.
“If we do get more serious downdrafts from China or elsewhere it may be that the RBA might contemplate a further cut in rates,” Stephen Miller, the head of Australian fixed income at BlackRock in Sydney, said by phone on Dec. 2. “We don’t expect that at the moment, but that’s the thing we worry about more than an increase. If the market began to think that, it would add some pressure to the Aussie dollar.”
RBA Governor Glenn Stevens kept rates on hold for a 16th month on Dec. 2, saying in a statement that “the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices.”
“A lower exchange rate is likely to be needed to achieve balanced growth in the economy,” he said.
Australia’s relatively attractive bond yields have helped temper the currency’s decline. The nation’s debt offers the highest yields among the world’s AAA rated sovereigns.
The nation’s 10-year yield closed at 3.07 percent today, down from 4.24 percent at the start of 2014.
The premium Australian bonds offer over U.S. Treasuries shrank to 0.76 percentage point on Dec. 1, the least since July 2006 based on closing prices and down from as much as 1.53 percentage points in March. The spread may keep narrowing and weigh on the Aussie, which is overvalued by at least 5 percent, Insight’s Lambert said.
The world’s 12th-largest economy has maintained higher interest rates than most of its peers as it avoided a recession for more than two decades.
“Australia has gone so long without a recession and the old economy is built on commodity-related investment that is just now beginning to turn down,” Eric Stein, who oversees about $13 billion at Boston-based Eaton Vance Corp., said on Dec. 2 in an e-mailed response to questions. “This development should have a big effect on the currency and monetary policy.”
Even after this year’s decline, Australia’s dollar is about 20 percent overvalued, the most among Group of 10 currencies after New Zealand’s, according to a measure of purchasing-power parity that takes into account consumer-price gains.
Goldman Sachs Australia Chief Economist Tim Toohey said today the Aussie will slide to 83 cents in three months and 79 cents in the next year.
The Aussie will weaken below 80 cents, said Simon Doyle, who oversees the equivalent of $13.5 billion as head of fixed income and multi-asset at Schroder Investment Management Australia Ltd. in Sydney.
“Commodity prices are moderating and the U.S. dollar should be getting stronger,” he said. “We wouldn’t be surprised at all to see the Aussie dollar in the 70-cent range in the next six months.”
Raw-material prices that powered Australia’s economy have declined in response to increased supply from new mines and China’s transition toward consumption-led growth.
“What’s frustrating the RBA at the moment is they have a view that if we look at where the Aussie dollar is relative to the prices of Australia’s commodity exports, it should be lower,” said BlackRock’s Miller, who manages the equivalent of $13.5 billion in bonds and cash. “I expect that they’re right, and I expect it will happen.”