Aussie Drop on Commodities Is `Overdone,' Says Bank of America

By Candice Zachariahs

Aug. 13 (Bloomberg) -- The Australian dollar, the worst performing major currency in the past month, will pare losses because declines tied to lower prices of commodities are ``overdone,'' according to Bank of America Corp.

The local dollar has slumped 10 percent in the past month as the Reuters/Jeffries CRB Index of 19 commodities plunged 17 percent to the lowest since early 2005. The currency's loss is excessive because the prices of Australia's largest raw material exports of iron ore and coal, which are not included in the index, are still rising, said John Rothfield, a senior currency strategist at Bank of America in San Francisco.

``Pessimism about the Australian commodities story has been overdone,'' Rothfield wrote in a research note dated yesterday. ``Part of the drop in the Australian dollar is an appropriate adjustment to downward shifts in rates support and the outlook for the economy this year, the other part related to weaker commodity prices is overdone.''

The currency fell as low as 86.68 U.S. cents, the weakest level since Jan. 24, before trading at 86.68 cents at 12:04 p.m. in Sydney from 87.38 cents in late Asian trading yesterday. The Australian dollar, which has fallen from a 25-year high of 98.49 cents reached July 16, will trade at 94 cents by the end of the third and fourth quarters, Bank of America forecasts.

Commodity Indexes

The Reserve Bank of Australia's commodity price index, which tracks prices of 18 raw materials the nation exports on a monthly basis in U.S. dollar terms, has risen 136 percent since early 2005 through July. The CRB index, which includes prices of orange juice and cocoa, has increased 35 percent over the same period.

Spot prices for iron ore and thermal coal, which make up more than a third of the RBA's commodity basket, have risen above recent contract price increases, Rothfield wrote. This will help offset declines in metals prices for Australia's export earnings, he said.

Australia's trade balance turned to a surplus in June as coal exports jumped, bolstering the nation's 17-year economic expansion. The trade surplus was A$411 million ($356 million) compared with a revised deficit of A$253 million in May.

To contact the reporter on this story: Candice Zachariahs in New York at czachariahs1@bloomberg.net