Aussie’s China Ties Boomerang in G-10’s Biggest Cuts

China’s slowdown is reverberating in Australia, where strategists are cutting their estimates on the local dollar faster than any other Group of 10 currency on the prospects for reduced trade between the nations.

The median year-end forecast for the currency that traders call the Aussie has declined by 2.9 percent since the end of April to $1, or parity, from $1.03, according to data compiled by Bloomberg. As recently as January, the outlook was for $1.05.

While Australia’s dollar has tumbled the most this month since September 2011, it’s still 29 percent overvalued as measured by purchasing-power parity based on consumer prices. That’s making the currency even less attractive after the International Monetary Fund lowered its outlook for growth in China, Australia’s biggest export market, this year and next.

“The Aussie dollar remains at levels that are very restrictive for the economy,” Adam Bowe, a Sydney-based money manager at Pacific Investment Management Co., which oversees the world’s biggest bond fund, said in a phone interview yesterday. “The recent fall has just taken us back to the lows of the past couple of years.”

Erasing Gains

Australia’s currency has weakened 6.8 percent since April to trade at 96.69 U.S. cents as of 1:46 p.m. in New York. It reached 95.28 U.S. cents yesterday, down from last month’s high of $1.0582 on April 11 and its weakest level since October 2011. The Aussie’s 6.6 percent depreciation this quarter more than wipes out its 3.4 percent gain in the first three months of the year, Bloomberg Correlation-Weighted Indexes show.

Even after the declines, the Australian dollar’s value when adjusting for the cost of living trails only the Norwegian krone and Swiss franc, based on an index developed by the Organization for Economic Cooperation and Development.

Its real effective exchange rate was 110.75 at the end of April, within 1 percent of the strongest level since at least 1994, data from the Bank of International Settlements show.

Dearborn, Michigan-based Ford Motor Co. cited the Aussie’s strength when it announced this month that it would stop making cars in the country. Interest-rate swap prices show that traders expect the central bank to lower borrowing costs at least once more this year to weaken the currency and boost competitiveness.

Slower Growth

“The Australian dollar is overvalued,” Hamish Pepper, a Singapore-based currency strategist at Barclays Plc, said by phone yesterday. “A negative impact of a high currency is what it does to your export sector, and the closure of Ford is an example of that.”

Australia’s economic growth will probably slow to 2.65 percent this year from 3.58 percent in 2012, according to the median estimate of 30 economists surveyed by Bloomberg. Pepper, who previously worked for New Zealand’s central bank, sees the Aussie trading at 96 U.S. cents in six months.

The IMF in Washington lowered its growth forecast for China yesterday. The economy will grow about 7.75 percent this year and next, the IMF estimates, compared with earlier projections of 8 percent for 2013 and 8.2 percent in 2014.

The reduced outlook follows a slowdown in first-quarter growth to 7.7 percent as President Xi Jinping tries to shift manufacturing away from coastal regions to China’s interior. Pimco yesterday said growth in the Asian region’s biggest economy may decline toward a 7 percent pace.

“China’s determined to commit to the economic rebalancing, which means demand for some Aussie exports like raw materials will probably drop in the coming years,” Ju Wang, an Asian foreign-exchange strategist at HSBC Holdings Plc in Hong Kong, said by phone yesterday.

Bear Market

The London-based lender expects the Aussie to drop to 90 U.S. cents by year-end, the most bearish forecast among analysts surveyed by Bloomberg after Credit Suisse Group AG’s estimate of 89 U.S. cents. HSBC projected 95 cents on April 30.

Iron ore, Australia’s most valuable commodity export, slumped into a bear market this week. China is the world’s largest buyer of iron ore and Australia is the biggest exporter of the raw material.

Australia’s dollar is also coming under pressure from the domestic economy. Australia’s record mining investment boom is probably at its peak after companies scrapped or put off A$150 billion ($145 billion) of resource and energy projects in the past year, the government said this month.

Investment Declines

Business investment unexpectedly fell 4.7 percent last quarter as mining and manufacturing spending declined, Australian government data today showed. The median forecast was for a 0.5 percent gain in a Bloomberg News survey. The Aussie strengthened after the report as mining companies forecast investment in the 12 months ending June 30, 2014, will be A$101.9 billion, 3.7 percent above projections for a year earlier.

The Reserve Bank of Australia has lowered its key rate by 2 percentage points in 19 months to a record 2.75 percent. Traders see about an 80 percent chance it will fall to 2.5 percent or less by November, Bloomberg data on overnight-index swaps show. Lower rates tend to weaken a currency by making a nation’s fixed-income assets less attractive to international investors.

Australia is one of 11 nations that hold top AAA grades from the three main credit-rating companies, making its securities popular with central banks. Offshore holdings of the nation’s bonds were equal to 70 percent of outstanding debt on Dec. 31, according to government data compiled by Bloomberg.

‘Patient’ Bulls

“Aussie bulls can afford to be patient,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, said in a phone interview yesterday. “The Aussie’s still going to be the highest-yielding G-10 currency even if the RBA were to cut rates” as much as expected, “and global reserve managers have shown a proclivity toward chasing a higher yield and higher credit,” she said.

RBC expects the Australian dollar to rise to $1.12 at the end of this year, making it the most bullish forecaster in the Bloomberg News survey. Its outlook is unchanged from April.

U.S. Federal Reserve Chairman Ben S. Bernanke’s comment this month that he could taper monetary stimulus measures should the U.S. show signs of sustained improvement drove yields on Treasuries higher, boosting the attractiveness of the greenback.

Australian 10-year government bonds yielded about 1.16 percentage points more than similar-maturity Treasuries this week, down from 2.75 percentage points in 2010 and the least since 2008. The U.S. Dollar Index has risen about 5 percent to 83.005 from this year’s low of 78.918 on Feb. 1.

Futures Traders

Futures traders have turned bearish on the Australian dollar for the first time in almost a year.

The difference in the number of wagers by hedge funds and other large speculators on a drop in the Aussie compared with those on a gain -- so-called net shorts -- was 32,409 on May 21, the most since the week ended June 12, figures from the Washington-based Commodity Futures Trading Commission show. Just a month earlier, there were net longs of 31,257 contracts.

“If there’s going to be a broad U.S. dollar rally, you can sell the Aussie dollar without causing any concerns among policy makers in Australia,” Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, said in a phone interview on May 28. The lender has cut its year-end forecast for the Aussie to 99 U.S. cents from $1.01 in April. “In fact, you’ll find them welcoming the move.”

Before it's here, it's on the Bloomberg Terminal.