Aussie Dollar to Recover on Economy, Say Bank America, Barclays

By Candice Zachariahs

Nov. 19 (Bloomberg) -- Australia's dollar, the worst- performing major currency since June 30, will rally next year as the country skirts a recession while Europe, Japan and the U.S. shrink, Bank of America Corp. and Barclays Capital said.

The currency will rally as the market pares expectations the Reserve Bank of Australia will slash interest rates toward 3 percent, analysts at the two banks said in separate reports. The Australian dollar, which dropped 32 percent against the U.S. currency this half to trade at 64.63 U.S. cents as of 12:05 p.m. in Sydney, will reach 70 cents in six months, Barclays forecasts. Bank of America predicts a gain to 77 cents by March 31.

``We expect that the economy will narrowly miss a recession and post 1.5 percent growth in 2009,'' wrote Singapore-based David Forrester, a currency strategist with Barclays Capital, a unit of Barclays Plc, the U.K.'s second-biggest bank, in a research note yesterday.

The RBA has slashed rates two percentage points since September in its steepest cuts since 1991, while Prime Minister Kevin Rudd announced a A$10.4 billion ($6.7 billion) stimulus package to spur domestic spending in October. Along with the Aussie's decline, those actions ``would cushion, but probably not fully offset,'' the negative impact of the financial crisis and tumbling commodity prices, policy makers at the RBA said in minutes released yesterday of the bank's November meeting.

The Australian economy, which expanded through the 1997 Asian financial crisis and the dot-com bust, may see gross domestic product ``temporarily dip below zero for just the third quarter 2008,'' wrote San Francisco-based John Rothfield, a senior currency strategist with Bank of America, the third- biggest U.S. bank by market value.

The Aussie, as the currency is also called, is ``oversold from a medium term, fundamental perspective'' and should buy 72 U.S. cents by the end of this year, Bank of America said.

Commodities Prices

Barclays expects the currency to decline to 60 cents through February and then advance to 70 cents in the following three months. The Australian currency has tumbled after reaching a 25- year high of 98.49 U.S. cents on July 16, as prices for commodities dropped. The country relies on raw materials for about 60 percent of exports.

The Reuters/Jefferies CRB Index of 19 commodities has plunged 49 percent since reaching a record on July 2. Demand from China, Australia biggest trading partner, may steady commodity prices at mid-2000 levels for the next few years, Rothfield wrote. China announced its own $586 billion stimulus plan this month and the world's fastest-growing economy expanded 9 percent in the third quarter.

Interest Rates

Australia's dollar has led declines among the 16 most-traded currencies against the greenback since June 30. Brazil's real, also a commodity-dependant currency, was the second-largest decliner with a loss of 31 percent.

Bank of America forecasts that the RBA will lower rates a further one percentage point to 4.25 percent in six months. Barclays' Forrester predicts the RBA's benchmark rate will fall to 4.5 percent in December and ``bottom'' at 4 percent in the second quarter.

Traders are betting that Governor Glenn Stevens will slash the cash rate 75 basis points on Dec. 2, according to a Credit Suisse index based on overnight swaps trading. There is a 70 percent change of a 100 basis point cut priced in. A basis point is 0.01 percentage point.

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