A
year ago, when I started this blog, Australia was still the lucky
country and the New Zealand PM was crowing that although others might
have problems “we're alright mate”.
As
predicted it turns out we're not “alright mate”
Aussie
Debacle Flags China Hard Landing as Iron Market Melts
From
the end of 2008 through July, no major currency appreciated as much
as Australia’s dollar, thanks to booming shipments of iron ore and
other commodities to China. Since then, it’s the worst performer as
the engine of world growth slows.
25
September, 2012
The
so-called Aussie depreciated 1.5 percent in the past month, the
biggest decline among 10 developed-nation currencies tracked by
Bloomberg Correlation-Weighted Indexes. Traders are betting
Australia’s central bank will cut interest rates to boost growth,
dragging down the currency even though the Standard & Poor’s
GSCI Index of commodities has risen about 18 percent from its low
this year in June.
This
reversal shows the dangers for an economy tied too closely to
another. China, which buys 28 percent of Australia’s exports, said
industrial output grew at the slowest pace in three years last month
as Europe’s debt crisis cut sales of Chinese goods. Polls show
Prime Minister Julia Gillard’s governing Labor Party is under
pressure before elections due next year.
“The
Australian dollar is very expensive from whichever metrics you look
at,” Dagmar Dvorak, a director of fixed-income and currencies in
London at Baring Asset Management, which oversees $50 billion, said
in an interview on Sept. 20. “When a currency overvaluation is that
extreme, you have to question what could be a trigger that stops it.
For the Aussie, it’s the economic slowdown in China and falling
commodity prices. The currency looks vulnerable.”
Rebound
Curtailed
Baring
has joined Credit Suisse Asset Management and Quantum Global
Investment Management as onetime bulls turned bearish. The Australian
dollar was 39 percent overvalued against its U.S. counterpart on
Sept. 20 as measured by the Organization for Economic Cooperation and
Development. That’s more than other currencies that tend to rise
and fall with commodity prices, such as those of New Zealand and
Canada.
The
Aussie appreciated to its highest level against the U.S. dollar in
about six months on Sept. 14, after the Federal Reserve announced a
third round of bond buying designed to boost growth and reduce
unemployment. The gain was short-lived, and the currency has since
weakened against 13 of its 16 major counterparts.
Resource
Boom
Australia’s
currency fell 0.9 percent last week as a report on Sept. 20 showed
China’s manufacturing may contract for an 11th-straight month and
an International Monetary Fund official said the same day it would
cut its forecasts for global economic expansion. The Aussie was at
$1.0408 as of 12:33 p.m. in New York today, 0.5 percent lower than
the close on Sept. 21.
“We
are worried about Chinese growth and think the short- term risk for
Australian dollar is a bit too high for us,” Gareth Fielding, the
chief executive officer at Quantum Global Investment Management in
Zug, Switzerland, said on Sept. 17. “The rally has come a long way.
We are a buyer if it falls below parity with the dollar.”
Australia’s
economy was bolstered by the biggest resources bonanza since a gold
rush in the 1850s as Chinese-led demand for iron ore, coal and
natural gas surged in part because of Beijing’s 4 trillion yuan
($635 billion) stimulus package in 2008. Iron ore from Australia went
into everything from skyscrapers in Shanghai to a shipyard in Dalian.
Most
Expensive
The
Aussie rode the boom, advancing 48 percent against the dollar since
Dec. 31, 2008, and 60 percent versus the euro through Sept. 21.
Exports to China more than doubled to A$71.5 billion last year from
A$32.3 billion in 2008, according to data from the Department of
Foreign Affairs and Trade.
This
rally made the Australian currency the most expensive among
developed-nation currencies, based on the relative costs of goods and
services as measured by the Paris-based OECD. The Canadian loonie and
the New Zealand kiwi were each 21 percent overvalued versus the
dollar using the same measure.
It
also made it attractive to as many as 23 central banks from Brazil to
Russia, according to data provided by the Reserve Bank of Australia
under a Freedom of Information Act request by Bloomberg News. The
share of global foreign-exchange reserves dominated in “other
currencies,” which strategists said includes Australia’s dollar,
rose to 5.2 percent in the first quarter, from 2 percent in 2007,
according to the IMF.
Shipping
Costs
“We
suspect that there will be very heavy buyers of Aussie” over the
long term, Todd Elmer, a currency strategist at Citigroup Inc. in
Singapore, said in a phone interview on Sept. 11. “It makes
enormous sense as a currency, in part because of commodities, in part
because of higher returns, in part because of Australia’s more
stable fiscal positions, than most major economies.”
Shipping
costs rose last week, covering their running costs for the first time
since July, as Chinese iron-ore buyers increased purchases after the
nation announced plans for extra infrastructure spending.
RBA
Governor Glenn Stevens predicted in August that the resource boom has
at least another year to run before it begins to ease. Business
investment accounted for about 17 percent of Australia’s gross
domestic product in the first half of 2012 and is forecast to
increase further in the next year, driven by mining projects,
according to an RBA report.
Investors
are showing concern that Australia’s economy may slow after the
price of iron ore, which made up more than 20 percent of exports last
year, dropped as much as 37 percent this year to the lowest level
since October 2009.
China
Slows
Fortescue
Metals Group Ltd. (FMG), Australia’s third-biggest producer, cut
its spending plans by 26 percent as iron-ore prices declined. BHP
Billiton Ltd (BHP), the world’s largest miner, delayed work at the
Olympic Dam copper-uranium-gold project in South Australia last
month, joining companies including Xstrata Plc and Rio Tinto Group in
scaling back expansion.
“For
Australia, the best news is behind us,” Adrian Owens, a money
manager at GAM in London, said in a phone interview on Sept. 19.
“China is struggling. In the short run, there’s been a few minor
tweaks in terms of stimulus but that may not reverse a trend of
slower growth.”
GAM,
a unit of GAM Holding AG with $48 billion under management, is buying
the Mexican peso, Owens said.
Barclays
Plc, Morgan Stanley, Royal Bank of Scotland Group Plc and UBS AG
forecast growth of 7.5 percent for China this year, the weakest since
1990. Pacific Investment Management Co. (PTTRX), which runs the
world’s biggest bond fund, predicts a slowdown to 6.5 percent to 7
percent in the next 12 months.
China’s
net exports and investment have “reached their limits,” Ramin
Toloui, Pimco’s co-head of emerging markets portfolio management in
Singapore, said in a Sept. 13 e-mail.
‘Stretched’
Valuation
Australia’s
economy grew 0.6 percent in the second quarter from the prior three
months, according to a Bureau of Statistics report on Sept. 5, slower
than the median estimate of economists for a 0.7 percent gain.
Home-loan approvals unexpectedly fell in July by the most in five
months.
“We
are cautious” at these price levels for Australia’s dollar,
Stefan Keitel, Credit Suisse Asset Management’s global chief
investment officer, said in a Sept. 3 phone interview.
The
firm, which has $385 billion under management, has sold Australian
government bonds and is waiting for a “better entry level” as the
currency’s valuation is “stretched” after a prolonged rally, he
said.
Rate
Outlook
The
Aussie is trading about 30 cents higher than its average since
exchange controls were scrapped in 1983. The RBA said Sept. 18 that
it saw the strength of the local currency and slowing growth in China
as risks to the domestic economy, signaling scope to cut interest
rates.
After
lowering the benchmark overnight cash-rate target by a total of 1.25
percentage points from October in an effort to boost growth, Stevens
and his board left it at 3.5 percent for the past three meetings
since June.
Traders
see about an 84 percent chance policy makers will cut the benchmark
cash rate by 25 basis points on Oct. 2, and a 97.6 percent likelihood
of a reduction by year-end, interest- rate swaps show. Lower
borrowing costs may make the currency less attractive to investors as
they reduce returns on fixed- income assets.
“We’ve
been seeing mining companies pulling back capital expenditure and
iron-ore prices are still much lower than last year’s highs,”
Mansoor Mohi-uddin, the global head of currency strategy at UBS AG in
Singapore, said on Sept. 19. “The currency could definitely go
below parity if the markets get more concerned about further easing.”
‘Pillar’
Crumbles
Gillard,
the country’s first female prime minister, has seen her party’s
poll ratings trail the opposition since after Australia’s 2010
election. She has pledged spending cuts and increased taxes to return
the nation’s budget to surplus after four years of deficits.
The
budget-surplus plan will reduce public spending and curb growth,
Yoshisada Ishide, who oversees $14 billion at Daiwa SB Investments
Ltd. in Tokyo, said in a telephone interview on Sept. 13. Ishide
manages the biggest mutual fund focused on Australian
dollar-denominated debt.
“The
resource sector is one of the major pillars of Australia’s economy,
and markets are cautious that demand for commodity exports will slow
more evidently, which is negative for the economy,” Ishide said. He
forecasts the currency will finish 2012 at parity to the U.S. Dollar.
Standard
Chartered Plc revised down its end-2013 forecast for the Australian
dollar on Sept. 4, after having been jointly the second-most bullish
forecaster in a Bloomberg survey of analysts as of July 1. It now
predicts the Aussie will fall to 95 U.S. cents by the end of 2013
from a previous projection of $1.07.
“The
Australian economy and its currency look vulnerable because of its
exposure to China,” Peter Redward, a principal of Auckland, New
Zealand-based Redward Associates Ltd. and former head of
emerging-markets currency strategy at Deutsche Bank AG, said in an
interview on Sept. 13. “We have yet to see the full impact on
export values from the sharp fall in coal and iron ore prices. When
it hits, the economy will slow, the central bank will cut rates and
the Australian dollar will fall.”
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