Buy Australia Dollar as Investment, Commodities Strong, TD Says

By Garfield Reynolds

Sept. 2 (Bloomberg) -- Investors should buy Australia's dollar against the U.S.'s as high commodity prices may prompt the central bank to indicate it remains concerned about inflation when it cuts interest rates, TD Securities Ltd. said.

Australia's dollar is the worst performer among the 16 most-active currencies versus the U.S. dollar since June 30, dropping today to the lowest in almost a year, as investors bet the Reserve Bank of Australia will lower borrowing costs. The bank will cut its benchmark rate at 2:30 p.m. in Sydney for the first time in seven years as economic expansion slows, according to 22 of 23 economists surveyed by Bloomberg News.

``The recent Australian dollar free-fall looks overdone,'' Stephen Koukoulas, London-based head of global foreign exchange and fixed income strategy for TD Securities, wrote in a client note dated yesterday. ``There is a very real possibility of a hawkish interest rate cut and an Australian dollar bounce.''

Australia's dollar dropped 0.4 percent to 84.93 U.S. cents at 9:42 a.m. in Sydney, from 85.29 late in Asia yesterday. The currency, known as the Aussie, touched 84.69, the lowest since Sept. 19. It has slumped almost 12 percent this quarter.

TD Securities recommended buying Australia's dollar at 85.25 cents, with a target of 89 and an automatic instruction to sell the currency at 83.90 in case the bet goes the wrong way.

Business Investment

The Reserve Bank may pause after cutting rates because a government report last week showed business investment rose more than twice as much economists forecast in the second quarter as mining companies spent extra on machinery and equipment to meet demand from China. The bank also yesterday published a report showing that its index of Australian commodity prices rose 7 percent in local currency terms as coal and wheat surged.

``Since the Australian dollar was floated in 1983, there has been a pretty solid correlation between the currency and the RBA commodity price index,'' Koukoulas wrote. Also, ``there has been a run of stronger domestic data from outside the household sector. Private sector capital expenditure and company profits have been particularly buoyant and inventories are currently quite low.''

Traders expect the central bank to cut its overnight cash rate target, currently 7.25 percent, by 1 percentage point in the next 12 months, according to a Credit Suisse Group index based on interest-rate swaps.

To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net