Top Aussie Forecaster Fox Sees 10% Drop to 80: Australia Credit

Jan 08, 2014 9:08 pm ET

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Jan. 9 (Bloomberg) -- Emirates NBD forecasts a 10 percent slide in Australia’s dollar this year, almost three times the drop predicted by HSBC Holdings Plc., which it ousted as the top forecaster for the currency.

Emirates, the most accurate at predicting the Aussie over the past four quarters in data compiled by Bloomberg, expects it to fall to 80 U.S. cents by Dec. 31 as the Reserve Bank of Australia focuses on supporting growth while the Federal Reserve reduces stimulus, according to Tim Fox, Dubai-based chief economist at Emirates. Second-ranked HSBC is projecting a slide to 86, one cent below the median of 39 year-end forecasts, from 89.24 at 5 p.m. yesterday in Sydney.

“The biggest driver for the Australian dollar will be the relative stance of monetary policy of the RBA, which will veer towards being dovish, especially when compared to the Fed,” Fox said in a Jan. 6 e-mail interview. “The domestic economy will remain relatively sluggish due to reduced investment in the mining sector.”

Emirates isn’t ruling out cuts to Australia’s record-low 2.5 percent benchmark even as traders see a 77 percent chance the RBA will maintain rates at current levels until at least July. Prime Minister Tony Abbott’s government has pledged spending cuts amid a wider-than-expected budget gap this fiscal year, weighing down an economy whose manufacturing and services industries are contracting and resource investment is falling.

Saxo Bearish

Saxo Bank A/S, the Aussie’s fifth-best forecaster, sees a steeper drop to 75 cents by Dec. 31, while fourth-ranked Societe Generale SA predicts a decline to 83.

RBA Governor Glenn Stevens said last month he and his board have maintained an “open mind” on whether they need to cut interest rates further. They have reduced the benchmark by 2.25 percentage points since the beginning of November 2011.

Fed policy makers said Dec. 18 they will taper monthly bond purchases to $75 billion from $85 billion. They will probably reduce purchases in $10 billion increments over the next seven meetings before ending them in December, according to the median forecast in a Bloomberg News survey.

The RBA’s accommodative stance comes amid the government’s plans to rein in spending after a December forecast that the underlying cash deficit will balloon to A$47 billion in the year ending June 30, from a previously projected A$30.1 billion.

The economy's expansion slowed in the third quarter to 0.6 percent from the prior three months, when it rose 0.7 percent, data showed Dec. 4.

Modest Growth

The Australian Industry Group’s manufacturing and services indexes remained in contractionary territory in December, while a gauge of construction weakened, according to reports this month. Data today will show retail sales gains moderated and building approvals fell, another Bloomberg economist poll shows.

“Growth should only show a modest pick-up, but with signs of rebalancing in coming quarters as non-mining aspects of the economy benefit from low interest rates,” David Bloom, London- based global head of currency strategy at HSBC, said in a Jan. 6 e-mail interview. “A lower Australian dollar is at the heart of the success of this rebalancing.”

HSBC topped the previous rankings for the four quarters to Sept. 30, according to data compiled by Bloomberg.

Even after the Aussie’s 14 percent slide against the U.S. dollar last year, the biggest annual decline since 2008, it remains 24 percent overvalued, according to Organization for Economic Cooperation and Development estimates compiled by Bloomberg.

Reserve Demand

Global demand for assets in Australia, one of only 10 nations with the top credit score from all three of the major ratings companies, has supported the currency.

Central banks Aussie-denominated reserve holdings grew by 0.7 percent to $102.3 billion in the third quarter from the previous three-month period, according to International Monetary Fund data published Dec. 30. Adjusted for valuation changes, Aussie-dollar purchases were close to zero, following two quarters of strong buying, Adam Cole, head of Group-of-10 currency strategy at the Royal Bank of Canada in London, wrote in a Jan. 3 report.

Australia’s 10-year bond yielded 4.30 percent or 1.35 percentage points more than U.S. Treasuries of similar maturity. The spread is down from a 2013 high of 1.71.

High Yields

“Global central bank reserve managers are attracted to Australia’s relatively high yields and AAA rating,” Kit Juckes, global strategist at Societe Generale, said in a Jan. 6 e-mail interview. “But as U.S. yields rise, the pressure on both central bank and other investors to hunt for yield in far-flung markets fades considerably.”

Beginning in October, Stevens has said the economy needs a weaker currency on at least five occasions. The Aussie started its most recent slide days before he warned speculators on Oct. 29 to “take care” about backing the local dollar. On Nov. 5 and again on Dec. 3, following policy decisions, he said the Aussie was “uncomfortably high.”

On Nov. 21, the RBA chief said policy makers won’t “always eschew” intervention when weighing the costs and benefits of currency sales. In an interview published in the Australian Financial Review Dec. 13, he signaled a weaker Aussie is preferable to lower rates and a level of 85 cents would be “closer to the mark than 95 cents.”

“I think they will be fairly persistent in talking the currency lower as long as it is near 0.90,” John Hardy, the Copenhagen-based head of foreign-exchange strategy at Saxo Bank, said in a Jan. 3 e-mail interview.

“The external environment doesn’t look promising for Australia, with potential weakness in demand for Australian exports and a currency that, despite the correction lower, is too strong,” Hardy said.

--With assistance from Wei Lu in New York. Editors: Candice Zachariahs, Jonathan Annells