Aussie to Fall 3% as Emerging Markets Tumble, BT Investment Says

Australia’s dollar will drop to 85 U.S. cents and may weaken further with the currency trading as a proxy for emerging markets that are being rattled by outflows as the U.S. withdraws stimulus, BT Investment Management Ltd. said.

An index of 20 emerging market currencies has fallen 2.8 percent this month, the most since May when Federal Reserve Chairman Ben S. Bernanke floated the idea of reducing $85 billion in monthly bond buying that’s flooded markets with cash. The Aussie slid 1.5 percent since Dec. 31 to 87.87 cents as of 10:37 a.m. in Sydney, dropping a third month. China, Japan, South Korea, the U.K. and India are Australia’s largest merchandise export markets.

Investors are losing confidence in some of the biggest developing nations as slowing Chinese growth combines with political uncertainties in Turkey, India and Ukraine. That’s adding to pressure on the Aussie, already hobbled by a sluggish domestic economy and calls by the Reserve Bank of Australia for a weaker currency to assist growth.

“I’m short the Aussie because the RBA has told me they’d like it weaker and it’s trading in line with emerging market currencies,” said Vimal Gor, who oversees A$15 billion ($13.2 billion) as the Sydney-based head of income and fixed interest at BT Investment Management, referring to bets that profit when an asset’s price falls. “The RBA wanted the Aussie at 85 cents and now that it’s close they want it lower still. They would probably be very happy if it fell to around 80.”

The Aussie dropped 13 percent in the past year, the worst performer among 10 developed market currencies tracked by Bloomberg Correlation Weighted Indexes. It will end the year at 85 cents, according to the median of forecasts compiled by Bloomberg.

Moving Together

The 20-day correlation between the Aussie and the emerging market currency gauge rose to 0.63, the highest since Nov. 13, where a reading of 1 would indicate they move in lock step.

The current environment makes Australian and U.S. government bonds attractive investments, according to Gor. He’s betting on gains in Australia’s 10-year debt and U.S. securities due in five years, while also positioning for higher volatility and a stronger U.S. currency.

Australia’s 10-year yield rose two basis points, or 0.02 percent, to 4.03 percent today after yesterday touching 3.99 percent, the least since October.

The nation’s central bank probably won’t adjust its benchmark interest rate over the next 12 to 18 months, though there is some risk of a further cut, Gor said. The RBA has kept borrowing costs at a record-low 2.5 percent since August.

80 Cents

Governor Glenn Stevens signaled a weaker Aussie is preferable over lower rates to help spur the economy, in an Australian Financial Review interview published Dec. 13. He said in the report that “85 U.S. cents would be closer to the mark than 95 cents.” Board member Heather Ridout said in a Wall Street Journal interview published Jan. 24 that 80 cents would be a fair deal for everybody.

A Jan. 16 report showed the unemployment rate holding at a four-year high of 5.8 percent after employers unexpectedly cut jobs in December. Consumer prices climbed 2.7 percent in the fourth quarter from a year earlier, the fastest pace since 2011, a separate release this month showed.

“With what’s happening globally, the RBA will be much more concerned about the labor market than they will be about inflation,” Gor said. “Australia is one of those markets where you can try and take the carry out of it because the RBA won’t be doing anything. The economy is generally quite weak.”

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