April 19 (Bloomberg) -- The Australian dollar’s push to parity with the U.S. dollar is in jeopardy as central bankers signal they may slow the pace of interest-rate increases and China moves closer to revaluing the yuan.
After rallying 28 percent the past 12 months, more than any other currency tracked by Bloomberg, Morgan Stanley predicts the Aussie may tumble 16 percent by year-end because higher borrowing costs will curb growth. Barclays Capital, which in December forecast a peak of $1 in 2010, now expects the Australian dollar to be the biggest loser from what it calls a “significant” yuan revaluation.
The currency is “fully priced,” said Scott Ainsbury, a New York-based money manager who helps invest about $9 billion at FX Concepts Inc., the world’s biggest foreign-exchange hedge fund. “It’s probably time to lighten up,” he said. The Aussie may weaken about 3 percent before rising by year-end.
Traders and strategists say Reserve Bank of Australia Governor Glenn Stevens may have increased borrowing costs too far, too fast after lifting the nation’s overnight cash rate to 4.25 percent this month from 3 percent in October. Home-loan approvals fell in February for a fifth month, and retail sales and building approvals declined more than forecast, according to the median estimates of 19 economists in a Bloomberg survey.
Avoiding Recession
The RBA’s most aggressive tightening cycle since 2000 comes amid growing speculation China will allow its currency to appreciate to help cool an economy that expanded at the fastest pace in almost three years last quarter.
That means China, Australia’s largest trading partner, may buy fewer commodities produced by companies such as Melbourne’s BHP Billiton Ltd. and Perth’s Woodside Petroleum Ltd., demand that helped Australia avoid the global recession and expand 2.7 percent in 2009.
“A yuan revaluation could prove to be a reason for a market rather long Aussie to trim its positions,” Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, said about the bullish sentiment. “As part of an effort to cool inflation and tighten monetary conditions, a revaluation would certainly be a negative for the Aussie.”
China told banks to stop loans for third-home purchases in cities with excessive property price gains and suspend lending to buyers who can’t provide tax returns or proof of social security contributions, according to a State Council statement on April 17.
Currency Forecasts
The Aussie, as the currency is known, fell 1 percent last week to 92.43 U.S. cents, after rising from 72.25 U.S. cents a year earlier. It declined 0.7 percent to 91.80 cents as of noon in London today, compared with April 16. Measured by Bloomberg Correlation-Weighted Currency indexes, Australia’s dollar slid 0.93 percent last week, the most this year.
Australia’s currency is likely to trade at 93 cents by June, according to the median estimate of 26 strategists surveyed by Bloomberg. In January, they predicted an exchange rate of 95 cents. The year-end estimate is 92 cents.
“Valuations are extremely stretched,” Calvin Tse, a strategist at Morgan Stanley, wrote in an April 15 research report to clients. The firm is the most bearish surveyed, expecting a drop to 84 cents by the end of this quarter and to 78 cents in December.
Traders are more bullish than strategists. The difference in the number of wagers by hedge funds and other large speculators on a gain compared with those on a drop -- so-called net longs -- rose to 80,674 on April 13, the most in three years, figures from the Washington-based Commodity Futures Trading Commission show.
Housing Cracks
“The only thing we don’t like about the Australian dollar is that everyone else likes it,” said Axel Merk, president of Palo Alto, California-based Merk Investments LLC, which manages $550 million in mutual funds that specialize in currencies. “If the Chinese allow their currency to move higher they have more purchasing power, and they can buy more commodities.”
Merk’s Hard Currency Fund, designed to protect against a weaker U.S. dollar by investing in currencies of countries that target inflation, has about 11 percent of its cash in the Aussie, which may reach parity this year, he said.
Rate increases are starting to temper the housing market. Mortgage costs have risen more than the RBA’s cash target, to 6.25 percent in March, based on the average discounted floating rate charged by the nation’s four biggest lenders.
‘Soft Elements’
Home-loan approvals fell 1.8 percent in February to 50,287 from January, when they declined a revised 7.3 percent, the statistics bureau said April 12 in Sydney. Two weeks earlier, the government said retail sales dropped 1.4 percent from January, and the number of permits granted to build or renovate houses and apartments decreased 3.3 percent.
“Australia has some soft elements in its economy and these interest rate hikes will bring them to the fore,” said Venkatraman Anantha-Nageswaran, the Singapore-based global chief investment officer at Bank Julius Baer & Co., a 120-year-old Swiss private bank. “I wouldn’t buy the Aussie dollar at current levels.”
Interest-rate swaps showed this month traders expect that tightening of monetary policy by the U.S. Federal Reserve over the next 12 months will match that by the RBA, based on Credit Suisse AG indexes. Australia’s benchmark compares with a range of zero to 0.25 percent in the U.S. and 0.1 percent in Japan.
Rate Outlook
Royal Bank of Scotland Plc forecast in January the Aussie would be at parity with the greenback by March. It now expects a peak of 95 U.S. cents in June and September before slipping to 90 cents by year-end, as Australia’s rate advantage over the U.S. diminishes, said Greg Gibbs, a currency strategist in Sydney with RBS.
“The situation where we needed historically low interest rates has passed,” RBA Assistant Governor Guy Debelle told a Senate committee April 12. “So we’re moving back to something around average levels, which is not far from where we are now.”
High relative rates are one of two main reasons why international investors have put money into the Aussie. The other is China, where 4 trillion-yuan ($586 billion) of stimulus spending on housing, highways and power grids sparked record imports of iron ore from Australia, the largest shipper. China’s government said April 15 its economy expanded at an 11.9 percent pace in the first quarter.
Growth is so strong that Chinese officials are taking steps to keep the economy from overheating. The cabinet raised minimum mortgage rates and down payment ratios for some home purchases, saying “more forceful” steps are needed to cool speculation after prices rose at a record pace in March.
Yuan Forecasts
Economists expect the next steps will include allowing the yuan to strengthen, with the median estimate in a Bloomberg News survey climbing 3 percent to 6.62 per dollar by year-end, from 6.8275 today. The currency has traded at about 6.8 to the dollar since July 2008.
Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill in London said China may allow the yuan to strengthen 2 percent to 5 percent as soon as this week and permit it to float freely within five years.
A revaluation may drive up prices of commodities as dollar- based imports to China become more affordable, Citigroup Inc. said in March. There could be a repeat of the price surge in 2005, when the Reuters/Jefferies CRB Index of 19 raw materials surged about 10 percent in the first six weeks after China ended its peg, the bank said.
Negative Reaction
“The Aussie has generally reacted negatively to any sign of a tightening of policy by China,” said David Forrester, a Singapore-based strategist at Barclays.
Barclays predicts the Aussie will weaken to 84 cents in the next six months, as China allows a 5 percent annualized rate of appreciation and its central bank raises rates three times this year.
Australia’s dollar fell as much as 1.3 percent intra-day to 91.71 cents on Jan. 12 when the People’s Bank of China announced higher bank reserve requirements and guided its benchmark one- year bill yield higher for the first time in 20 weeks. It surged 1.3 percent on July 21, 2005, when China increased the yuan’s value by 2.1 percent, only to slump 4.3 percent over the next five months, the second-biggest drop after the yen among the most-traded currencies tracked by Bloomberg.
“We had a tightening in monetary conditions globally outside of Australia, while Australia was sitting pat, so its interest-rate advantage was eroded,” Forrester said. “We expect a similar outcome in the coming six months.”
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
Last Updated: April 19, 2010 07:12 EDT
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