Top Forecaster HSBC Sees 9% Aussie Drop on Fed: Australia Credit

The Australian currency’s top forecaster is predicting an almost 9 percent drop by the end of 2014, exceeding the consensus outlook, as the Federal Reserve’s taper of stimulus policies will revive a faltering U.S. dollar.

HSBC Holdings Plc, the most accurate at predicting the Aussie over the past four quarters in data compiled by Bloomberg, expects it to fall to 90 U.S. cents by Dec. 31 and 86 cents by the end of 2014 from 94.24 at 1:32 p.m. in Sydney. The currency climbed last quarter by the most since 2011, prompting economists surveyed by Bloomberg to raise their end-2014 forecast to 89 cents from 88 as recently as Sept. 18.

“The markets got a bit more excited about Aussie recently, but we don’t share that enthusiasm,” David Bloom, the London-based global head of currency strategy at HSBC, said by phone on Oct. 4. “The Aussie will continue to fall slowly but surely as the resurgent U.S. dollar sweeps all in its wake, driven by an eventual tapering by the Federal Reserve.”

HSBC sees the Aussie sliding next year to levels unseen since July 2010 as the Fed starts scaling back bond purchases that have buoyed higher-yielding assets. In Australia, the two-year yield has dropped seven basis points in the past six months to 2.72 percent, the biggest slide among 21 developed bond markets outside Israel and Spain tracked by Bloomberg, as the Reserve Bank warned of the peak in a mining investment boom and Treasury predicted decade-high unemployment.

Emirates NBD and Canadian Imperial Bank of Commerce, the second and third-best forecasters, see a deeper decline to 85 cents during 2014. Investec Securities and Bank of America Merrill Lynch, who took the No. 4 and No. 5 spots, are less bearish, picking 88 by Dec. 31, 2014.

‘Growth Impulse’

The Aussie slid to a three-year low of 88.48 cents on Aug. 5 from its 2013 peak of $1.0599 on Jan. 10. It has fallen 8.2 percent since 2012 versus nine other developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the worst performance after the yen.

The impact of a boom in Australia’s resources sector, which helped drive 2.7 percent growth in 2008 as the global financial crisis unfolded, is now fading, according to Patrick Bennett, Hong Kong-based strategist at CIBC.

Gross domestic product expanded 2.5 percent a year on average between 2009 and 2012, the fastest pace among 11 major developed economies, data compiled by Bloomberg show. The Reserve Bank of Australia has said growth this year will slow to 2.25 percent, the weakest since 2009.

“The pace of expansion in Australia for three or four years from 2008 is just not going to be repeated,” Bennett said by phone on Oct. 2. “There has to be a wholesale reassessment of what the growth impulse is going to be.”

Jobs Declines

The statistics bureau said on Oct. 2 Australia had a trade deficit of A$815 million ($768 million) in August, more than double the median estimate by economists surveyed by Bloomberg News. Building approvals declined 4.7 percent in the same period, exceeding analyst forecasts for a 0.5 percent drop, according to a separate report last week.

Government data last month showed payrolls unexpectedly dropped and the unemployment rate climbed to a four-year high. As mining activity slows, the nation’s jobless rate is predicted to climb from 5.8 percent to 6.25 percent by the middle of 2014, according to Treasury estimates. That would be the highest since 2002.

The RBA kept borrowing costs at a record-low 2.5 percent on Oct. 1. “A lower level of the currency than seen at present would assist in rebalancing growth in the economy,” Governor Glenn Stevens said in a statement after the decision.

Aussie Overvalued

Even after this year’s decline, the Aussie is still 27 percent overvalued versus its U.S. peer, according to purchasing power parity estimates by the Organization for Economic Cooperation and Development.

“We remain of the view that the Aussie dollar is overvalued and in time, it will come off,” Philip Shaw, a London-based economist at Investec Securities, said by phone on Oct. 2. “Some of the global dynamics have changed over the past few months and those have resulted in the Aussie firming more recently.”

Signs of economic stabilization in China, Australia’s biggest trading partner, and U.S. dollar weakness amid a partial government shutdown may help keep the Aussie above 90 cents for the rest of 2013 and into early next year, Shaw said.

China’s Economy

Chinese government figures this month showed manufacturing in the world’s second-biggest economy expanded in September by the most in 17 months, while a gauge of services climbed to a six-month high. HSBC raised its 2013 growth forecast for China to 7.7 percent from 7.4 percent previously last week.

The Bloomberg U.S. Dollar Index closed at a seven-month low on Oct. 3 as a deadlock among U.S. lawmakers kept the government in shutdown and failed to produce an agreement to raise the debt limit, increasing the risk of a default.

Bank of America revised its year-end Australian dollar forecast to 91 cents from 89 previously after the Fed unexpectedly refrained from paring back its $85 billion of monthly Treasuries and mortgage-backed security purchases at its Sept. 17-18 meeting, according to Adarsh Sinha, the head of Asia-Pacific Group-of-10 foreign-exchange strategy. The bank’s outlook for 2014 remains unchanged at 88, he said.

“In terms of the Fed, obviously that has been a surprise, but I think the assumption of most people is that it’s only a matter of when, not if, they’re going to taper,” Sinha said by telephone from Sydney on Oct. 3.

Twenty-four of 41 economists surveyed Sept. 18-19 said the Fed will start slowing its bond-buying in December. That, combined with expectations for RBA rate cuts in the first half of next year, may mean the Aussie’s 2 percent advance last quarter will be short-lived.

RBA Cuts

Westpac Banking Corp. and National Australia Bank Ltd. said last week they see a cash-rate reduction in February, with Westpac calling for another one in May. Interest-rate swaps data compiled by Bloomberg show traders see 45 percent odds policy makers will cut the benchmark to 2.25 percent or lower by May.

Should the RBA decide to cut rates again, it would probably do so in the next six months, according to Tim Fox, the Dubai-based chief economist at Emirates.

“The relatively constant message that you get from the RBA is a weaker currency would be helpful,” Fox said by phone on Oct. 2. “If at all, the RBA’s preference would be to ease rather than to tighten.”

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