Photographer: Carla Gottgens/Bloomberg

Templeton Sees Aussie Drop to 60s as China Spurs RBA Cut Risk

  • ‘Cuts are still potentially on the agenda’ in 2016, Beck says
  • Aussie is this month’s worst-performing Group-of-10 currency

Franklin Templeton Investments predicts Australia’s dollar will probably drop below 70 U.S. cents and its central bank is likely to cut interest rates again as Chinese growth slows.

The Aussie dollar will see “marginal weakness,” and a level around 70 or the high 60s would be appropriate, John Beck, a director of fixed income in London at Franklin Templeton, said in a telephone interview Wednesday. The median estimate of more than 50 analysts surveyed by Bloomberg is for this month’s worst-performing Group-of-10 currency to end the year at 72 cents, from 72.21 as of 12:05 p.m. in Sydney on Thursday.

“We want to be somewhere at the weaker end of expectations and that probably is a 6 handle rather than a 7 handle,” Beck said of the Australian dollar. With regional growth disappointing, “rate cuts are still potentially on the agenda for the balance of the year in Australia,” he said. 

China is Australia’s largest export market and while its once insatiable appetite for commodities fueled the Aussie’s rise above $1, a slowdown in the Asian nation is now pushing the currency lower. Declining levels of mining investment and a commodity price slump have helped send wage growth to record lows, with full-time positions falling for a third time in four months in April. Signs of disinflation prompted the Reserve Bank of Australia to cut the cash rate to an unprecedented 1.75 percent this month.

Slower Growth

China’s economic growth will probably slow to about 5 percent to 6 percent, requiring countries such as Australia to generate new sources of demand for its goods and services, something a weaker currency would help with, Beck said. The Asian nation expanded 6.7 percent in the first quarter from a year earlier, in line with the government’s growth target of 6.5 percent to 7 percent for the full year.

“Maybe that means that the Aussie dollar trades slightly on the weak side of historic standards as the economy rebalances,” he said. “If the Aussie dollar is somewhere in the 60s, it absolutely is fair value.”

Franklin Templeton’s domestic Aussie fund is overweight the U.S. dollar and Mexican peso against the Australian currency, Beck said.

Mining Boom

Australia’s dollar has dropped about 35 percent from its 2011 peak of $1.1081 at the height of the mining boom as China slowed and growth in the U.S. picked up sufficiently to allow the Federal Reserve to raise rates. The Aussie has averaged about 76.30 cents since it was floated freely in 1983.

Traders predict the RBA will reduce its benchmark to 1.41 percent in a year, based on swaps data compiled by Bloomberg. The market scaled back the amount of easing it expected after minutes of the most recent central bank meeting released Tuesday suggested authorities may hold off taking the cash rate lower while they assessed the impact of the rate cut announced two weeks ago.

A “broad-based” weakening of inflation pressures helped persuade the RBA that the economy would be helped by a cut even as policy makers considered leaving the rate unchanged, according to the minutes of the May 3 meeting.

“Frequently the RBA, or any government reserve bank minutes, can be over-analyzed for the nuances that some of the time aren’t there,” Beck said. Compared with the U.S., “the inflation number is much, much lower in Australia, and equally the growth rates that Australia is exposed to are very much more regionally dependent than internally focused, and so I think that this global policy divergence which we felt clearly was a theme in 2014 and 2015 is perhaps slowing, but is absolutely still there in 2016.”

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