From coal to iron ore, soaring commodity prices are paving the way for the Australian dollar to rebound from its worst first quarter in five years.
Royal Bank of Scotland Group Plc says the currency may jump about 4 percent against the dollar by the end of September after the Standard & Poor’s GSCI Index of 24 commodities climbed three-straight quarters. Credit Suisse Group AG predicts it will rise that amount over a year. Futures traders boosted bets this month on a stronger currency to the highest since at least 1993.
The so-called Aussie may strengthen because the central bank will increase interest rates, already the highest in the developed world, while the Federal Reserve keeps borrowing costs at record lows, according to surveys of economists by Bloomberg. Demand from China for Australian raw materials, which account for about 60 percent of exports, may be augmented by Japan rebuilding from last month’s earthquake and tsunami that caused an estimated $300 billion in damage.
“The commodity story that is driving Australia, not just now but over the last few years, will continue,” said Ray Farris, chief strategist for Asia-Pacific fixed income and global head of foreign-exchange strategy at Credit Suisse in Singapore. “The fundamental picture for the Aussie over the next 12 months is very, very good.”
Analyst Estimates
Australia’s dollar will probably strengthen compared with the U.S. currency, reaching $1.10 in a year, from $1.0568 last week, Farris said. It fell 1.8 percent in the three months through March, according to Bloomberg Correlation-Weighted Indexes. That was the worst start to a year since 2006, when it declined 2.3 percent.
Analysts are boosting estimates for the Aussie even as a measure of the Paris-based Organization for Economic Cooperation and Development signals the currency is 38 percent too strong versus the dollar. It has climbed 50 percent since 2008, reaching $1.0584 on April 8, the highest level since it was allowed to trade freely in 1983.
Strategists surveyed by Bloomberg News have lifted fourth- quarter forecasts against the U.S. dollar 9.9 percent since September to the most on record. The Aussie surged 14 percent last year to $1.0233. It was at $1.0539 as of 11:17 a.m. in London today.
Aussie Vulnerable
Money is flooding into Australia because the nation produces about 20 percent of the world’s iron ore, 7 percent of its liquefied natural gas and 6 percent of its gold. Ore climbed 4.3 percent in the past year, while coal-export prices from Newcastle, Australia, a benchmark for Asia, jumped 25 percent in the period, according to Petersfield, England-based IHS McCloskey. Gold advanced to a record for a third day today, trading at $1,488.68 an ounce.
That makes the Australian dollar vulnerable to a drop in raw-material prices.
Goldman Sachs Group Inc. ended a recommendation that investors buy a basket of commodities including crude oil, copper, cotton and platinum, saying on April 11 that the risk of a price decline outweighed the potential for more gains. The basket rose 25 percent since the trade was started on Dec. 1, the New York-based bank said.
“The momentum is in favor of the Aussie but I think we should also recognize that the air is getting pretty thin up here,” said Daragh Maher, deputy head of foreign-exchange strategy at Credit Agricole Corporate & Investment Bank in London. “You’ve got a market that’s pretty much positioned one way, so people will get increasingly nervous about the risks that you get a substantial retracement.”
‘Crowded Trade’
Wagers by futures traders on additional gains have boosted the chances of a decline, according to Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto.
The difference in the number of wagers by hedge funds and other large speculators on an advance compared with those on a drop was 90,651 on April 12, compared with 90,938 on April 5, the most since Bloomberg began tracking the data.
“When the market becomes too heavily positioned one way things can unwind very quickly,” said Osborne, who forecasts the currency will end the year at 96 U.S. cents.
While Treasurer Wayne Swan said on April 12 the Aussie’s strength was a burden for parts of the economy, the currency is becoming a favorite for investors because of the nation’s relatively high interest rates and prospects for economic growth.
Commodity Prices
Gross domestic product will increase by 2.6 percent this year and 3.95 percent in 2012, according to the median of eight economist forecasts compiled by Bloomberg. That compares with 3 percent and 3.1 percent in the U.S., and 1.7 percent this year and next in the euro region, separate surveys show.
The S&P GSCI jumped 18 percent this year, adding to an 81 percent surge in the past two years. Australia’s benchmark stock index, the S&P/ASX 200 Index, increased 2.3 percent this year, compared with a 0.7 percent gain in the Stoxx Europe 600 Index.
“We are seeing commodity prices rise once again, so that should also support the Aussie dollar,” said Bilal Hafeez, London-based head of foreign-exchange strategy at Deutsche Bank AG, who forecast it may rise to $1.08.
Australia’s key rate of 4.75 percent compares with a range of zero to 0.1 percent in Japan and zero to 0.25 percent in the U.S. The Reserve Bank of Australia raised borrowing costs seven times since October 2009. Benchmark rates exceed those in the euro area by 3.5 percentage points and 4.25 percentage points for Britain.
Relative Rates
The premium investors get from holding Australian two-year government debt instead of Treasuries was 4.33 percentage points on April 15, almost double the average since 2000.
While the European Central Bank raised its key rate this month by a quarter-percentage-point to 1.25 percent, the difference with Australia will remain unchanged this year, surveys shows. The Fed won’t raise borrowing costs until the first quarter, according to the median of 67 economist forecasts compiled by Bloomberg.
Aussie gains may also be fueled by commodity customers boosting orders. China accounts for 25 percent of Australia’s exports, with Asia taking more than 70 percent, RBA Governor Glenn Stevens said in a speech in New York on April 13. Asia bought about 50 percent of Australian exports as recently as 2003, he said.
Japan Reconstruction
China increased banks’ reserve requirements yesterday for the fourth time this year after inflation accelerated to 5.4 percent in March, more than the 2011 target of 4 percent set by Premier Wen Jiabao. Central bank Governor Zhou Xiaochuan said two days ago that monetary tightening will continue for “some time” and he sees no “absolute” limit on how high reserve requirements can go.
Japan, the second-biggest buyer of the South Pacific nation’s exports, increased purchases 14 percent last year to A$43.6 billion ($46 billion). The country accounted for about 19 percent of Australia’s overseas sales in 2010, according to Australian Bureau of Statistics data.
Copper, iron ore and beef are likely to benefit from rising demand in Japan as the country recovers from its biggest earthquake on record, analysts at National Australia Bank Ltd. and Rabobank Australia Ltd. said this month. The 9-magnitude earthquake and deadly tsunami on March 11 left more than 28,000 dead or missing and caused radiation leaks at a nuclear plant.
Greg Gibbs, a strategist at Royal Bank of Scotland in Sydney, expects the currency to peak at $1.10 by the end of the third quarter. As a result, the Aussie will be buoyed by “enormous investment plans for the next several years related to ongoing confidence in the commodities market.” www.bloomberg.com