Photographer: Brent Lewin/Bloomberg

Top Forecaster Sees Aussie Demons Capping Gains

  • TMS sees Aussie bottoming out by June, ending 2016 at 71 cents
  • China, resources and Fed outlook to cap Aussie gains, TMS says

The top Aussie dollar forecaster says that while the unwinding of carry trades that dragged it to an almost seven-year low is nearly over, the rebound will be anemic.

Konrad Bialas, a strategist in Warsaw at TMS Brokers, sees the Australian currency clawing back to 71 U.S. cents by Dec. 31, more optimistic than the median forecast of 69 cents, but still implying a fourth year of losses. The online foreign-exchange trader was also the third-best forecaster of 13 major currency pairs in Bloomberg rankings for 2015, a year when the U.S. central bank raised interest rates for the first time in almost a decade and China’s economy showed signs of slowing.

“We are close to the moment when risk appetite will recover,” Bialas said. “That will help the Aussie,” he said, though “other demons -- China, the grim outlook on commodities -- will stay.”

Bialas estimates that a “big chunk” of Aussie underperformance came from the unraveling of carry trades that involved, in particular, borrowing euros at near zero percent to buy a currency linked to a higher benchmark rate. The Reserve Bank of Australia cash rate currently stands at 2 percent and policy makers have signaled a reluctance to take it any lower. Australia last month capped its strongest year for job growth since 2006, with the country’s services sector propelling gains as the mining industry cooled.

“I expect the Aussie-U.S. dollar to bottom some time in the second quarter as improved competitiveness of sectors unrelated to mining, a strong labor market and a recovery in inflation will give rise to speculation about the return of the RBA to raise interest rates later this year,” Bialas said.

The Aussie has dropped 5.6 percent this year to 68.78 U.S. cents as of 2:08 p.m. on Wednesday in Sydney and fell to 68.27 on Jan. 15, the weakest since March 2009. With investor confidence shaken by China’s surprise yuan devaluations and global stocks sliding to the lowest level since July 2013, the Australian and New Zealand dollars have led declines among Group-of-10 currencies this year. The Aussie has fared worse against favored funding currencies, dropping 7.9 percent versus the yen and 6.3 percent against the euro.

Bets on gains versus the euro were built in the final quarter of 2015 and investors were forced to cut those positions as risk aversion gripped markets, Bialas said.

Returns Surge

Carry trade returns surged in the fourth quarter as European Central Bank President Mario Draghi hinted at additional stimulus measures, which typically depress a currency. Investors who sold the euro and bet on a stronger Aussie gained 3.5 percent in October and 5.7 percent in November, before losing 1.7 percent the following month, once interest-rate gains were included.

The December losses were only the tip of the iceberg as January unleashed a wave of risk aversion that rippled though equity, commodity and currency markets. The Aussie dollar, with its ties to China via exports of iron ore and coal as well as its position as a high-yielding developed market currency, has been among the worst hit.

Demand for the Aussie will stabilize amid improved risk appetite, though that will bring with it greater odds for U.S. rate increases, keeping gains contained, Bialas said. He forecasts the currency will fall to 68 U.S. cents by June before recovering to 69 and 71 cents in the next two quarters, based on estimates the Federal Reserve will increase rates three times, he said.

Holding Fire

While traders have been focused on financial market volatility, there are signs Australia’s economy has been holding up. A Jan. 14 report showed employers added 301,300 jobs in 2015, and 129,000 in the three months through December, the largest quarterly increase since records began in 1978. An inflation gauge compiled by TD Securities Inc. and the Melbourne Institute released Monday rose to 2 percent in December from a year earlier, the highest level in 13 months. The government will publish official consumer-price data on Jan. 27.

Domestic activity has been aided by a record-low borrowing benchmark after the RBA cut interest rates twice in 2015. Policy makers have held fire since May with Governor Glenn Stevens saying in November that traders should “chill out” until February when the RBA board will look at the data again.

Recent ructions in global markets have prompted swaps traders to raise to 64 percent the odds the RBA will reduce its benchmark by June, from 45 percent probability at the end of 2015, data compiled by Bloomberg show. In contrast, the Fed is predicted to follow its December rate increase with another by year-end.

“I was more certain that the RBA will cut at the beginning of the year when the Aussie-U.S. dollar was 72 cents,” Bialas said. “With the Aussie already so beaten, I think that the RBA could stay chilled a little more time.”

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