Australia’s Dutch Disease More Severe Than Canada’s: Currencies

The currency market is diagnosing Australia with a worse case of “Dutch Disease” than Canada as the commodity-heavy economies suffer the fallout from slumping prices.

After a decade-long boom in raw materials that pushed up their exchange rates, manufacturing in both countries is shrinking and some economists are drawing parallels to the Netherlands when it became too dependent on natural gas after its discovery there in 1959. Traders are betting Australia, which this year announced the closure of its last auto plant, may be slower to adapt to the current plunge in commodities than its North American cousin.

Canada’s dollar is outperforming its antipodean counterpart by the most in a year against an index of developed-market peers, and forecasters from Sydney-based Westpac Banking Corp. to Toronto-based Royal Bank of Canada predict that trend will continue. National Australia Bank has recommended betting against the Aussie versus the loonie since March, and says it has no plans to abandon the trade.

“If you’re looking for evidence of Dutch Disease, the shrinking of manufacturing and other sectors outside of energy and mining, Australia has suffered a lot more than Canada over the last 15 years,” Greg Moore, a senior currency strategist at RBC, said in a Dec. 5 phone interview from Toronto.

Rate Divergence

The Aussie has depreciated more than 6 percent from its intraday high this year on Sept. 8 against a basket of nine developed-market peers, Bloomberg Correlation Weighted Indexes show.

It fell for a record nine days against the U.S. dollar to close at 82.93 U.S. cents yesterday in New York, down 12 percent since June 30 in a tumble almost twice as steep as the Canadian dollar’s. The Aussie was at 83.12 cents as of 10:44 a.m. in New York.

The Bloomberg Commodities Index has dropped 12 percent this year and yesterday reached the lowest level since 2009.

Economists now see the Reserve Bank of Australia cutting interest rates after the price for iron ore, which accounts for one-fifth of Australia’s export income, fell by about 50 percent this year.

Data today showed Australian consumer confidence dropped to the weakest in more than three years, after a report yesterday that business sentiment slid to the lowest since July 2013.

By contrast, strategists project the Bank of Canada will raise borrowing costs next year, after the central bank said last week a long-awaited shift to an economy driven by exports and business investment may be underway even with its largest export, crude oil, trading close to a five-year low.

U.S. Piggyback

Canada’s dollar has gained 1.3 percent against its peers since Sept. 8 and is up 8.4 percent from its intraday low on March 19, based on the Bloomberg indexes. The loonie has jumped about 5.5 percent this half to 95.42 Canadian cents per Aussie.

“The Canadian dollar is hitching a ride on the back of the U.S. recovery and U.S. dollar strength,” Robert Rennie, Westpac’s head of currency and commodity strategy in Sydney, said by phone yesterday. “The market continues to openly question the outlook for China from a growth point of view. Into next year that absolutely remains a weight on Aussie.”

China Deflating

Data this week showed China’s factory-gate deflation deepened and consumer prices climbed at the slowest pace since 2009, while imports unexpectedly dropped in November. China buys 35 percent of Australia’s outbound shipments, with iron ore the leading export and coal second.

Canada’s ties to the U.S., which economists in a Bloomberg survey predict will lead growth in developed nations next year, are even tighter, with 73 percent of Canadian exports heading to its southern neighbor.

“The benefit for Canada is its very tight linkages with the United States, and that’s where we have the one positive macro story at the moment,” Derek Halpenny, the London-based European head of markets research at Bank of Tokyo-Mitsubishi UFJ, said on Bloomberg Radio on Dec. 8. “Canada is actually the best-performing energy-related currency out there at the moment.”

Dutch Disease

Dutch Disease was a term used in the 1970s to refer to the Netherlands’ uneven economy after natural gas deposits were discovered in the North Sea. The resulting rise in the country’s currency was blamed for the demise of Dutch manufacturing.

While both Canada and Australia have seen the commodity sectors take up a bigger part of their economies as prices boomed, those industries now account for a bigger share in the South Pacific nation.

Mining and energy products made up 60 percent of Australia’s October exports and 28 percent of Canada’s, according to data from Royal Bank of Canada.

RBC recommended investors bet the Australian dollar will decline further against the Canadian in a Dec. 4 note. Westpac expects the Aussie to fall to 94 Canadian cents by mid-2015.

Westpac is joined by Goldman Sachs Group Inc., Deutsche Bank AG and National Australia Bank in predicting the Reserve Bank of Australia will have to cut rates.

NAB has recommended selling the Aussie versus the loonie since March, when the exchange rate was C$1.0215. It’s sticking with the call even after the initial target of 94.75 Canadian cents was reached this week.

“We’re going to let it run all the way down to 90 cents,” Raiko Shareef, a Wellington-based markets analyst at NAB unit Bank of New Zealand Ltd., said by phone yesterday.

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