China Iron Ore Makes Insight Aussie Bear; Deutsche Bank Sees 60s

Feb 20, 2014 9:58 pm ET

Feb. 21 (Bloomberg) -- The Australian dollar’s rally this month will be short-lived as demand for the nation’s chief export wanes with China stockpiling record amounts of iron-ore, according to Insight Investment Management Ltd.

Insight, a Bank of New York Mellon Corp. unit that oversees about $456 billion, expects the Aussie to reach new lows “in this cycle” as greater supplies of the nation’s commodity exports weaken prices, according to Paul Lambert, London-based head of currency at the fund manager. The Reserve Bank said this month Australia’s currency may fall with an expected drop in the worth of its export earnings. The Aussie may slide toward the low 60 U.S. cent area in 2015, Deutsche Bank AG said.

“The result of diminished demand and continued strong supply will be a resumption of the downtrend of commodity prices,” Lambert said in an e-mailed response to questions on Feb. 18. “This will worsen Australia’s terms of trade. Given that we now know that terms of trade dominates the RBA’s currency model, they would be hoping and expecting to see a lower Australian dollar.”

The Aussie is set for its first weekly slide in a month after a two-day drop in iron ore prices. Further declines in the currency will also be driven by falling mining investment and fiscal austerity at the same time as consumption is capped by decade-high unemployment, Lambert said. While the Australian dollar has risen 3.8 percent from a 3 1/2 year low of 86.60 U.S. cents reached Jan. 24, it’s down from a post-float record of $1.1081 that came in 2011.

Aussie Forecasts

The currency has fallen 0.5 percent this week to 89.89 U.S. cents as of 12:51 p.m. in Sydney. Economists surveyed by Bloomberg say it will probably fall to 85 cents by Dec. 31, a level unseen since July 2010.

Total iron ore inventory at Chinese ports monitored by Shanghai Steelhome Information Technology Co. climbed to 100.3 million tons in the week ended Feb. 14, the highest in figures going back to March 2010. Data from The Steel Index Ltd. show prices of the steel-making material dropped 1.2 percent over two days to $122.90 a metric ton yesterday, after touching a seven- month low on Feb. 11. A Citigroup Inc. gauge of Australia’s terms of trade -- or export earnings relative to the import bill -- fell on Feb. 10 to the least since July.

The stockpiling “makes us feel that strong demand will not be maintained,” Lambert said. Australian economic growth will probably “moderate again as mining investment continues to wane in the second half of this year and private consumption remains subdued against the background of a weak labor market.”

Price Correction

Westpac Banking Corp. said this week that the level of inventories may suggest a destocking cycle around the corner, according to an e-mailed note from Senior Economist Justin Smirk. Destocking occurred in 2012, which led to a significant correction in iron ore prices, he wrote.

Reports this month showed retail sales growth slowed in December, while payrolls unexpectedly declined in January to push the jobless rate to 6 percent, the highest since 2003. Australian Treasurer Joe Hockey pledged spending cuts at the end of last year after forecasts that showed the deficit may widen to A$47 billion ($42.2 billion) in the 12 months to June 30, from a previous A$30.1 billion shortfall estimate.

The impact of a weaker greenback on the back of recent, weather-hampered U.S. economic data will be temporary, according to Lambert. Expectations for the Federal Reserve to continue with a reduction in stimulus and an eventual improvement in U.S. indicators provides room for the dollar to strengthen and its Australian peer to weaken in turn, he said.

Policy Rift

Minutes of the Fed’s January meeting released this week pointed to a sustained decrease in the central bank’s monthly bond purchases, which currently stand at $65 billion. In Australia, policy makers left borrowing costs at a record-low 2.5 percent this month and signaled a period of rate stability.

Deutsche Bank sees downside risks to its forecast for the Aussie to fall to 75 cents by the end of 2015 as the divergence between U.S. and Australian monetary policy drives a “significant narrowing” in benchmark yield spreads, Sydney- based Adam Boyton, chief economist for Australia at the lender, wrote in an e-mailed note to clients today.

The extra yield Australian 10-year government bonds offered over similar-maturity U.S. Treasuries was at 1.44 percentage points today, down from last year’s high of 1.71 percentage points, according to data compiled by Bloomberg. The spread may narrow to 25 basis points by early 2016, Boyton wrote.

“A firmer U.S. dollar and a resumption of the downtrend of commodity prices, combined with softer domestic data in Australia, will take the AUD/USD exchange rate to fresh lows,” Insight’s Lambert said.

--Editors: Candice Zachariahs, Garfield Reynolds