Australian Dollar May Drop 25% on Commodities Slump, CBA Says

By Lukanyo Mnyanda

Oct. 23 (Bloomberg) -- The Australian dollar, headed for the worst year since a currency peg ended in 1983, may drop a further 25 percent through March as a slowing global economy saps demand for the country's exports, according to CBA Europe Ltd.

The currency, which slid 17 percent in the third quarter, may trade as low as 50.45 U.S., the weakest since Dec. 21, 2001, in the coming five months, according to Divyang Shah, chief strategist in London at CBA Europe, a unit of Commonwealth Bank of Australia. Shah expects the Australian dollar, which was at 67.5 U.S. cents as of 7:45 a.m. in Sydney, will be worth 59 U.S. cents at the end of the first quarter of 2009.

Australia's dollar, also known as the Aussie, slumped in the three months through Sept. 30 as the Reuters/Jefferies CRB Index, which tracks commodities futures, dropped more than a quarter. The Baltic Dry Index, a measure of shipping costs for commodities, plummeted more than 66 percent. High-yielding currencies including the Aussie, the South African rand and the Brazilian real have also dropped as concern the world economy is headed for recession makes so-called carry trades unattractive.

``Given the deteriorating outlook for commodities, the Aussie is going to remain under pressure,'' Shah said in a telephone interview yesterday. ``Extreme risk aversion is another factor that has weighed on the Aussie.'' Commonwealth Bank is Australia's largest provider of mortgages.

The Australian dollar has declined 23 percent versus the dollar in 2008, the fourth-worst performance of major currencies after the rand, South Korean won and real. The currency, which reached a 25-year high in July, hasn't lost more than a fifth of its value in a year since it was allowed to trade freely in December 1983, according to data compiled by Bloomberg.

Interest-Rate Cuts

The currency may also drop as the Australian central bank cuts interest rate to revive growth, reducing the yields for holding the nation's assets, Shah said.

The Reserve Bank of Australia is expected to cut its benchmark lending rate by 0.5 percentage point to 5.5 percent on Nov. 4, according to a Bloomberg survey of 16 economists. The rate stood at a 12-year high of 7.25 percent in August.

The country's interest rates made Australia a favorite for investors seeking higher returns using funds from a country with low borrowing costs. The risk is exchange-rate fluctuations can erode profits.

The Aussie, together with the rand and the Mexican peso, was one of the currencies described this week by Goldman Sachs Group Inc. as undervalued by more than 20 percent based on inflation, productivity and terms of trade.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net