Aussie dollar's rally after 30% drop in 3 years won't last, say analysts

Gains that made Australia's dollar the best-performing currency in the developed world this quarter are destined to fail, analysts say.
Gains that made Australia's dollar the best-performing currency in the developed world this quarter are destined to fail, analysts say. PHOTO: BLOOMBERG

SYDNEY (BLOOMBERG) - Gains that made Australia's dollar the best-performing currency in the developed world this quarter are destined to fail, analysts say, with those at the country's biggest banks among those calling the loudest for a reversal.

The Aussie climbed against all its Group-of-10 peers since Sept 30 on signs the nation's central bank won't cut the benchmark interest rate beyond a record-low 2 percent amid a revival in the jobs market.

Bears argue the Reserve Bank of Australia hasn't ruled out further easing if needed for an economy ravaged by a slump in China that's crushing prices of raw materials. And with the Federal Reserve preparing to raise its own interest rates, strategists surveyed by Bloomberg see the local dollar resuming its three-year slide and tumbling to levels unseen since 2009.

"The Aussie's recent rally is unlikely to last because the market is underestimating the chances that the RBA will cut rates again at a time when the Fed is set to start raising them," said Joseph Capurso, a Sydney-based strategist at Commonwealth Bank of Australia, the nation's biggest lender by market value. "Weak China growth and declining commodity prices don't argue for lasting Aussie dollar strength."

CBA predicts Australia's dollar will tumble to 65 US cents in the first half of next year, from about 71 cents on Wednesday in Sydney and compared with a six-year low of 68.96 cents in September.

Westpac Banking Corp and Macquarie Bank both see it sliding to 66 cents by June, and even the median estimate in a Bloomberg strategist survey puts the currency at 68 cents, a level it last reached in March 2009.

That would be a boon for the RBA and its governor, Glenn Stevens. A weaker currency boosts income from exports, something Australia needs with China - which buys more than a third of its shipments including iron ore and copper - struggling to revamp its economy. Copper prices fell to a six-year low on Tuesday and iron-ore delivered to China tumbled 4.5 per cent.

While reluctant to pursue ever-looser monetary policy for fear of inflating a real-estate bubble, Mr Stevens has cut interest rates for four years, shrinking the yield advantage his nation's 10-year bonds offer over US Treasuries to less than a quarter of its 2.8 percentage-point peak in February 2008.

The result has been a drop of more than 30 per cent in the Aussie versus the US dollar since 2012. A 13 per cent decline this year alone has left it on course for the steepest three-year decline since it was freely floated in 1983.

Australia's dollar interrupted its slide in September, buoyed by a leveling off in RBA interest rates and supported by gains in employment. A report last week showed the jobless rate unexpectedly fell in October, while minutes of the Nov 3 policy meeting released on Tuesday showed the RBA forecast growth would strengthen gradually.

Those anticipating a sustained advance - including a "large minority" of foreign investors who think the Aussie has bottomed out - are seeing "a false dawn," said Gareth Berry, a foreign-exchange and rates strategist at Macquarie in Singapore.

"If the currency doesn't fall on its own accord, the RBA has the ammunition to cut, which will eventually deliver currency weakness," said Mr Berry, whose bank was the most-accurate home-grown forecaster of the Australian dollar in Bloomberg's third-quarter rankings. "The currency will trickle lower, but not aggressively so over the next few months."

"The bears probably did get a bit too excited by August's China stock slump and yuan devaluation, wrongly viewing both as indicators of a significant deceleration in China's economy," said Sean Callow, a foreign-exchange strategist at Westpac in Sydney. "But Aussie bears should be able to take comfort that there's little chance that going into 2016 they'll be wrong-footed by a sudden upswing in global demand for commodities."