Australia Dollar to Slump to 59 U.S. Cents, CBA's Grace Says

By Candice Zachariahs
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Oct. 20 (Bloomberg) -- The Australian dollar will slump 15 percent in the next five months, according to Commonwealth Bank of Australia, the most bearish of 27 forecasts tracked by Bloomberg, as the U.S. and Europe fall into recession.

``It's unavoidable that the U.S. and Europe go into recession and probably Japan, too, and Asia will slow,'' said Sydney-based Richard Grace, chief currency strategist at Commonwealth Bank of Australia. He expects the currency will reach 59 U.S. cents in the first quarter of 2009. ``The world basically fell off a cliff and that's what changed our forecast,'' he said today by phone.

Banks including Commonwealth Bank and Westpac Banking Corp. had forecast in May that the Aussie, as the currency is also called, would reach parity versus the U.S. dollar on the back of a global commodity boom this year. The currency rose 0.3 percent to 69.11 cents at 8:45 a.m. in Sydney, from 68.88 cents late on Oct. 17 in New York.

The Australian dollar has tumbled 30 percent since reaching a 25-year high of 98.49 U.S. cents on July 16 as equity markets dropped after a global credit squeeze raised concerns the world will tip into a recession. Australia's 17-year economic expansion has been fueled by demand for commodities from emerging markets including China and India.

``We're going to continue to see downward revisions to global growth,'' Grace said.

The Australian dollar will fall to 59 cents in the first quarter of 2009, its lowest since March 2003, wrote Grace in a research note dated Oct. 17.

The currency will recover to 64 U.S. cents by the second quarter of 2009 and then to 75 cents by the end of next year.

Westpac now expects the currency will end 2008 at 65 U.S. cents, slide to 62 cents in the first three months of 2009 and then recover to 74 cents by the end of next year, according to Bloomberg data.

Interest Rates

The Reserve Bank of Australia reduced borrowing costs by 1 percentage point, the most since a recession in 1992, to 6 percent on Oct. 7, to spur slowing demand. Traders are betting the central bank will cut rates by a further 1.42 percentage points over the next 12 months, according to a Credit Suisse Group index based on overnight interest swaps.

``The narrowing in interest-rate spreads will also work to apply downward pressure on the Australian dollar,'' Grace said.

Australia's currency has been a favorite among so-called carry trade investors, who borrow in countries with lower interest rates and invest in nations offering higher returns. Japan has a benchmark rate of 0.5 percent and the key U.S. measure is 1.5 percent.

The risk in carry trades is that exchange-rate changes can erase profits.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net