A look at what will happen next in the world economies
Sunday, March 15, 2015
Decline of Australian dollar set to deepen
After our trip to Australia three years ago, i talked about how the Aussie economy would have difficulty and why; so, here we are now. Aivars Lode
By Netty Ismail
Reserve Bank of Australia governor Glenn Stevens will get a drop in the nation's dollar that's even steeper than his target, the world's biggest money manager says.
BlackRock, which oversees $US4.65 trillion ($6 trillion) worldwide, expects the Aussie to fall 9 per cent to US70¢ as the RBA cuts record-low interest rates to offset the pain caused by tumbling commodity prices.
The currency is approaching the US75¢ level Mr Stevens identified in December as his ideal exchange rate, declining to an almost six-year low of US75.61¢ last Wednesday.
BlackRock says the Aussie will keep sliding, because Mr Stevens will need to act to revive an economy struggling with the collapse of a once-in-a-century mining boom and a slowdown in China, which buys more than a third of Australia's exports.
The RBA held borrowing costs steady last week, after a reduction in February spurred concerns the housing market may overheat.
"We anticipate further rate cuts; we're seeing significant declines in the prices of Australia's commodity exports," Stephen Miller, the Sydney-based head of Australian fixed income at BlackRock, said. "If we put all those things together, we could well see the Aussie dollar down towards US70¢ in the second half of this year."
The Aussie has slipped 6 per cent against the US dollar this year, heading for a third straight quarterly decline, as expectations that the US Federal Reserve will raise rates support the greenback.
It fell 1.2 per cent to US76.13¢ on Friday.
Even with its recent drop, the local dollar was still "relatively high" given the state of the economy, RBA assistant governor Christopher Kent said last Wednesday.
Goldman Sachs estimates a one-in-three chance Australia will fall into recession in the next 12 months, while a Bloomberg survey of economists suggests the probability of a contraction has increased in recent months.
The economy grew 2.5 per cent in the 2014 fourth quarter from a year earlier, compared with 4.6 per cent growth in early 2012.
The Aussie was about 2 per cent overvalued last month and could still be considered too high to achieve "desired domestic economic outcomes", RBA documents, released under a Freedom of Information request, said.
Mr Miller is more bearish than most analysts.
Strategists see Australia's currency levelling off in 2015, with the median of more than 40 forecasts compiled by Bloomberg putting it at US74¢by year end.
Mr Miller said he expected the RBA to reduce interest rates twice more this year to 1.75 per cent, from a record-low 2.25 per cent.
Another cut to 1.5 per cent was also a possibility, he said.
Swaps traders see about 50 per cent odds that the RBA will reduce rates when it meets on April 7, prices compiled by Bloomberg show.
They are expecting at least one reduction by June and see about a 20 per cent chance of a 1.5 per cent rate in September, the data show.
Australia's central bank ended more than a year of inaction when it cut its benchmark interest rate in February, joining an avalanche of global policy easing led by the European Central Bank's decision to buy government bonds.
"A period where the currency is potentially undervalued relative to its fundamentals is something that the RBA seems to think would be a good thing for the economy," said Ray Attrill, global co-head of currency strategy at National Australia Bank.
"They haven't got anything to fear from an inflation standpoint."
Consumer prices rose at an annual 1.7 per cent pace in the fourth quarter. It is the slowest pace in 2½ years and below the 2 per cent to 3 per cent range the RBA seeks.
The Aussie's "fair value" level would continue to fall as the price of commodities exports slumped and US interest rates rose, said Paul Lambert, head of currencies at Insight Investment Management.
The money manager, which oversees the equivalent of about $US18 billion in currencies, was adding to bets that would profit from a weaker Aussie because it expected the RBA to cut rates again, Mr Lambert said.
The local dollar might have to fall even further than BlackRock forecasts to give the economy the boost it needed, said Greg Gibbs, head of Asia-Pacific markets strategy at Royal Bank of Scotland.
"The Aussie may have to become cheap," Mr Gibbs said from Singapore. "It could mean the currency has to go to US65¢ in the context of the stronger US dollar."