Goldman Asset Says Sub-$40 Iron Ore Won't Doom Aussie Resilience

  • Currency may climb to 75 U.S. cents, GSAM's Moffitt says
  • Aussie is defying gravity and should be be lower, ANZ says

It’s a question that’s confounded many in currency markets: Why hasn’t this quarter’s 31 percent slide in Australia’s chief export iron ore unwound all of the Aussie dollar’s rally?

For Goldman Sachs Asset Management, which has been positioned for gains in the Australian dollar since September, the answer is that almost everyone that wanted to sell the currency based on its link to the commodity has already sold. Another climb of 3.9 percent versus the greenback is possible, according to Philip Moffitt, the fund manager’s Asia-Pacific head of fixed income. The Aussie stands to benefit as concern may ebb over a slowdown in China and investors with bullish bets on the U.S. dollar close those positions once the Federal Reserve raises interest rates, he said Monday.

His view contrasts with Australia & New Zealand Banking Group Ltd., which wrote in a research note that the Aussie’s recent rally is defying gravity, and BNP Paribas SA, which estimated a 10 percent decline over the next few months was justified by one measure. Moffitt says that while iron ore’s slide below $40 a dry ton isn’t being ignored by foreign-exchange markets, there’s little appetite to sell the currency on further weakness.

“It’s the incremental seller that’s not there because they’ve already seen it and done it,” he said. “We wouldn’t be surprised if it got up to 75. If you look at the long run that kind of correction or reversal in a trend is meaningful, but it’s not huge by historic standards.”

Australia’s dollar was at 72.16 U.S. cents as of 3:51 p.m. in Sydney on Wednesday, 2.8 percent stronger than its Sept. 30 close. While the median estimate of more than 50 forecasts compiled by Bloomberg is for the currency to drop to 69 cents in the first quarter, the predictions range from 64 to 76 cents.

Goldman Asset entered a bullish Aussie position in September after the Fed’s decision to maintain policy settings spurred investors to increase exposure to riskier assets, said Moffitt, whose firm oversees or advises on more than $1 trillion.

The fund manager would probably close its Aussie bet if it reached 75 cents and “look to go short again,” he said, adding that it would also reverse course if the expectation of a “buy the rumor, sell the fact” trade around the Fed’s rate increase was proved wrong.

Hedge funds and other large speculators held a net 46,648 contracts seeking to profit from Aussie declines in the week through Dec. 1, after cutting bearish positions by the most since mid-September, Commodity Futures Trading Commission data show.

80% Decline

“The recent move higher in the Australian dollar has occurred with seemingly little fundamental support,” Daniel Been, a Sydney-based currency strategist at ANZ, wrote in a research note on Monday. “In particular, we think that the recent move lower in the iron ore price and the consequences of the decline for the terms of trade mean that the Australian dollar should be trading below 70 cents.”

The price of the steelmaking material has sunk due to an increase in low cost supply from the world’s top miners, while weakening demand from China is also weighing on the market. The price of 62 percent ore at the Chinese port of Qingdao sank to $38.65 on Tuesday, a record low in daily prices compiled by Metal Bulletin Ltd. dating back to May 2009. It’s headed for a third annual decline and has lost 80 percent since peaking in 2011 at $191.70.

Steven Saywell, a London-based strategist at BNP Paribas, estimated in a Dec. 3 note that the Aussie should fall to 65 cents over the next few months based on the bank’s medium-term cyclical equilibrium exchange-rate model and lower still if the drop in commodity prices is accounted for.

Recent Aussie gains have been pared this week, leading Commonwealth Bank of Australia to say that there are signs that the currency is once again starting to move more in line with the nation’s terms of trade, a measure of export prices relative to import costs. The currency has weakened 1.5 percent since Friday.

“We are beginning to see the recent divergence between the Australian dollar and commodity prices narrow,” Richard Grace, chief currency and rates strategist at Commonwealth Bank in Sydney, wrote Tuesday. “Historically the terms of trade has proved to be the best guide for medium-term Australian dollar direction.”

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