By Wes Goodman and Candice Zachariahs
Nov. 17 (Bloomberg) -- IPod music players and Big Mac hamburgers are showing the world's biggest investors that the Australian dollar, the worst-performing currency in the past six months, may be a bargain.
Apple Inc.'s ``Classic'' iPod costs $249 in the U.S. and the equivalent of $220 in Australia, a gap that suggests the so- called Aussie will appreciate as much as 24 percent to 80 U.S. cents by May, according to Tsutomu Komiya, a money manager at Daiwa Asset Management Co. in Tokyo.
``The Australian dollar is too cheap,'' after weakening 26 percent against the U.S. dollar and 36 percent versus the yen this year, said Komiya, who accurately predicted the start of the currency's decline in July. Daiwa owns 3.8 percent of the country's debt, the most among reported holdings. ``The Australian financial system is still healthy. Of course they have problems, but it's better than Japan or the U.S.''
Tokyo-based Kokusai Asset Management Co., the second-biggest holder of Australian debt, and Tyndall Investment Management Ltd. in Sydney also forecast gains, indicating the worst may be coming to an end for currencies other than the yen and the U.S. dollar as the global credit freeze starts to thaw.
They're betting China, Australia's biggest trading partner, will increase purchases of the nation's raw materials after announcing a $586 billion economic stimulus plan that includes building roads, railways and bridges. Investors also predict interest-rate cuts in Australia and government support for the currency will help the Aussie gain.
`It's Oversold'
``It's oversold and it should come back,'' said Roger Bridges, who manages the equivalent of $8 billion as head of bonds at Tyndall Investment. Bridges, whose Sydney-based International Bond Fund beat 95 percent of its competitors in the past month, said he bought the currency in October.
Komiya took the $249 U.S. cost of the iPod Classic, which Cupertino, California-based Apple says can play 30,000 songs and 150 hours of video, and divided it by the A$339 price in Australia to get a ratio of 0.735 Australian dollars to its U.S. counterpart. The Australian dollar traded at 64.78 U.S. cents at 12:58 p.m. in Tokyo, so the difference indicates the currency is undervalued by about 14 percent. Against the euro, the figure rises to 27 percent.
The iPod and Big Mac prices help gauge the currency's purchasing power parity, the exchange rate at which a basket of goods would cost the same in each country. Australian shops sell the cheapest iPods among 62 countries tracked by Craig James, chief equities economist at Commonwealth Securities Ltd. in Sydney.
``It's a quick and dirty measure of trying to assess trade competitiveness,'' said James, whose company is a unit of Australia's biggest bank by market value. The gauge ``suggests that the currency may have fallen a bit too far,'' he said.
A New Camera
Prices for Oak Brook, Illinois-based McDonald's Corp.'s Big Macs indicate the Australian dollar is undervalued by about 30 percent, based on the same formula. The burgers cost $3.69 in New York and A$3.86 ($2.53) in Sydney. Tourists are noticing similar bargains.
``We bought a more expensive camera than we would have otherwise,'' said Mary Walker, 60, a retiree from Minnesota visiting Sydney, referring to her new Canon Inc. model. ``We did stop and say, `converted to U.S. that's not really $350 is it?'''
The Australian dollar had the same purchasing power as 84 U.S. cents in September, according to the Paris-based Organization for Economic Cooperation and Development. The currency traded at an average of 81.8 U.S. cents that month. The OECD considers prices for a basket of goods and services in its monthly calculations.
`Value Trap'
Purchasing power, which forms part of strategists' valuation models, may be discounted as global growth slows.
``Investors need to be careful not to fall into the `value trap,''' David Woo, global head of currency strategy in London at Barclays Capital, the world's third-biggest currency trader, wrote in a report Nov. 10. The currency will slide to 60 U.S. cents in three months as a global recession curbs appetite for higher-yielding currencies, he wrote.
The International Monetary Fund said Australia's economy will expand 1.8 percent in the 12 months ending June 30, slower than its 2.2 percent global growth forecast for 2009. The U.S., Japan, U.K. and the euro region are headed for their first simultaneous recessions since World War II, the Washington-based fund said.
Australia's dollar is the worst performer in the past six months among the 16 currencies most-traded against the greenback, tumbling 34 percent since July 16, when it reached the highest since starting to trade freely in 1983.
Carry Trades
The currency, which fell 2.6 percent last week, may weaken to 64 U.S. cents by Dec. 31 and then rally to 68 at the end of 2009, based on the median estimate in a Bloomberg survey of analysts. The Australian dollar fell 4 percent to 62.95 yen last week.
Australia's benchmark S&P/ASX Index dropped 42 percent this year, versus a 45 percent decline for the MSCI World Index. BHP Billiton Ltd., the world's largest mining company, fell 36 percent as steel mills in China asked to defer iron ore deliveries because of slowing demand. The Reuters/Jefferies CRB Index of 19 commodities has dropped 31 percent in 2008, headed for its worst annual performance since records began in 1957.
Fund managers who borrowed in Japan or the U.S. to finance investments in higher yielding assets including Australian bonds are giving up the so-called carry trades, sending the currency lower, said Stephen Miller, a managing director in Sydney for BlackRock Inc., which oversees $1.26 trillion globally.
Rate Outlook
The Reserve Bank of Australia's key interest rate is 5.25 percent, compared with 0.3 percent in Japan and 1 percent in the U.S.
Australia will cut its rate 50 basis points by June 30, according to a Bloomberg survey of economists. The U.S. will trim its benchmark a quarter point, and Japan will lower its target 5 basis points, the survey shows.
Reserve Bank Governor Glenn Stevens already reduced the benchmark rate 2 percentage points since September, the steepest cuts since 1991, to preserve the nation's 17-year economic expansion. The central bank said it bought its own currency last week, following purchases in October.
``A lot of the risk aversion has been played out by selling the Aussie dollar,'' said Miller, who predicts more declines. Credit-market losses and writedowns since the start of 2007 are approaching $1 trillion, according to data compiled by Bloomberg.
Money Markets
A drop in money-market rates gave some investors confidence to return to carry trades. The London interbank offered rate, or Libor, that banks say they charge each other for loans has fallen 2.58 percentage points in five weeks to 2.24 percent, according to British Bankers' Association data.
In a statement after a five-hour summit in Washington, leaders from the Group of 20 nations on Nov. 15 urged a ``broader policy response'' to spur economic growth, including potential interest-rate cuts and fiscal stimulus.
Foreign-exchange traders accelerated net buying of Australian dollars last week, according to the Bank of New York Mellon Corp. in New York. Inflows were about 4 1/2 times greater than the average over the past year, the second-strongest influx among 22 currencies tracked by the bank's iFlow service.
China's construction plans will underpin growth, said Vivek Tulpule, the London-based chief economist at Rio Tinto Plc, the biggest exporter of Australian iron ore. BHP said last week it isn't cutting production as Chinese steelmakers delay orders because extra shipments can be sold on the so-called spot market.
`Beyond Expectations'
Australian Treasurer Wayne Swan said Nov. 11 that the stimulus package will improve growth prospects in the whole Asia- Pacific region.
Interest-rate cuts by the Reserve Bank of Australia may revive local borrowing, said Masataka Horii, a money manager at Kokusai. The $46.6 billion Kokusai Global Sovereign Open Fund holds a greater percentage of Australian dollars than the benchmark index it uses to gauge performance.
``Australia cut its policy rate dramatically, beyond our expectations,'' Horii said. ``That should make the economy recover in the future.''
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.
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