Aussie's Record Slump Is Over, or Has 18% to Go, Two Funds Say

  • Macro Currency sees chance Aussie slides toward 58 U.S. cents
  • Loomis Sayles says risk-reward favors gains for currency

Loomis Sayles says the worst is over for the Australian dollar. Macro Currency Group sees a 19 percent drop.

That’s not such an unusual divergence in opinion in Australia these days as investors struggle to divine the future for global commodities and China, Australia’s biggest trading partner. While Loomis’s Matt Eagan says “the risk reward is skewed to the upside” for Australia’s currency and predicts better Chinese growth, Macro Currency’s Mark Farrington flags prospects the Aussie will tumble to as low as 58 U.S. cents from 71.45 as of 12:57 p.m. in Sydney on Thursday. Analyst forecasts compiled by Bloomberg for 2016 range from 62 to 82.

The dichotomy reflects the mixed messages coming out of Australia’s central bank: pointing to signs of recovery on the one hand, while saying it has room to lower interest rates on the other. In China, strength in consumption and services is contrasting with sliding imports and factory-gate deflation as manufacturing continues to contract. 

“We think commodities will have another big leg down, all the metals and oil, another big leg down -- so the terms of trade story continues to deteriorate” for Australia, said London-based Farrington, the managing partner at Macro Currency, where he oversees $7.7 billion. “The Aussie needs to have a classical overshoot cycle low before it’s going to really be safe to bottom pick.”

Australia’s dollar has already dropped more than 30 percent from a record high reached in 2011 as slowing Chinese demand halted a record mining investment boom and slowed windfall export earnings. Now investors are weighing the outlook as the central bank pauses after lowering benchmark rates to an all-time low and the Federal Reserve prepares to raise U.S. interest rates for the first time in a decade.

The Aussie has climbed more than 3 percent since its low in September as traders reduced bets on further rate cuts after RBA Governor Glenn Stevens asserted that economic prospects “had firmed” in recent months.

The currency surged more than 1 percent and bond yields soared after a government report released Thursday showed the unemployment rate unexpectedly fell in October. The probability of more easing by the end of June dropped to about 50 percent from more than 60 percent odds seen on Wednesday.

China’s president this month signaled policy makers will accept slower growth, but not much slower, with an annual target of no less than 6.5 percent in the next five years, compared with the current level of 7 percent. Reports this week indicated industrial production, investment and consumer inflation slowed in October.

“Commodity currencies are already pricing in a lot of bad news related to the China economic slowdown and the potential for Fed rate hikes,” said Eagan, a money manager for the Loomis Sayles Bond Fund, which has about $19.3 billion. “The risk reward is skewed to the upside for the Australian dollar.”

Iron Ore

The currency has held up this quarter even as iron ore resumed a downtrend and dropped 12 percent in October. It was at $48.58 per metric ton on Wednesday with analysts predicting it will climb to $56 by the middle of 2016.

Farrington says we are only halfway through a period during which will see weak commodities, a falling Aussie as well as heightened financial market volatility, similar to what markets experienced in the late 1990s. The Australian dollar always overshoots “significantly” its fair value at the end of a commodities super cycle, he said in an interview in Sydney on Tuesday. 

“We have a low-60-cent view for next year, but I would expect that if this plays out similar to the 1990s cycle, which we think it will, then Aussie bottoms with a 50 handle not 60 -- so say 58 or 59 cents,” Farrington said.

Australia’s dollar last traded below 60 cents in April 2003. It has dropped about 30 percent since 2012, heading for its steepest stretch of annual declines since a 1983 decision to let the currency trade freely.

To start buying Aussie again “we need to have clearly within our sights a global growth pickup that is both synchronized and above trend,” Farrington said. “I can’t see that point yet.”

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