Shipping Costs Signal Aussie Dollar to Drop, TD Securities Says

By Chris Young

Sept. 11 (Bloomberg) -- The Australian dollar will extend its 19 percent drop from a 25-year high, judging by a plunge in the costs to ship coal and iron ore, the nation's biggest export earners, TD Securities Ltd. said.

The currency will slide 2.6 percent to 78 U.S. cents by year-end because a slump in the Baltic Dry Index, a measure of shipping costs for commodities, signals demand for the raw materials Australia exports is waning, said Stephen Koukoulas, London-based head of global foreign exchange and fixed-income strategy for TD, a division of Canada's Toronto-Dominion Bank.

``The BDI and Australian dollar track each other pretty closely so it is certainly causing us to have a big look at our forecasts,'' Koukoulas said yesterday. ``To the extent that the BDI keeps falling, the prices of the bulk commodities Australia exports will be skewed lower.''

The Australian dollar dropped to the lowest since August 2007 today as prices tumbled for raw materials, which account for about 60 percent of the nation's exports. The BDI slumped 11 percent this week as Chinese steelmakers, the largest buyers of iron ore, cut output.

The currency has dropped 1.8 percent this week to 80.05 U.S. cents as of 11:57 a.m. in Sydney and earlier reached a low of 79.44 cents. TD reversed a Sept. 2 forecast for the currency to rise to 89 cents by Dec. 31 after the Baltic Dry Index dropped to its lowest in 18 months.

The Baltic Dry Index tracking transport costs on international trade routes yesterday lost 4.4 percent to 5,026 points, according to the Baltic Exchange in London. That's the lowest since March 9, 2007. It has shed 45 percent this year.

Record Exports

Australia's dollar reached a 25-year high of 98.49 cents on July 17 as prices of iron ore, coal gold and oil rose to records this year, pushing exports to an all-time peak in June of A$23.05 billion ($18.47 billion.)

Australia's dollar will also decline as weakening demand for the country's resources slows the economy and encourages the central bank to keep cutting interest rates, Koukoulas said.

The currency has dropped 4 percent since Sept. 2, when the Reserve Bank of Australia lowered its overnight cash-rate target by a quarter-percentage point to 7 percent, its first reduction in seven years.

There is an 80 percent chance policy makers will reduce the rate to 6.75 percent when they meet next on Oct. 8, according to a Credit Suisse Group index based on swaps trading.

``The influences on the Australian dollar are lining up against the currency,'' Koukoulas said.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net.