Australian Dollar May Fall Versus Pound, Commonwealth Bank Says

By Ron Harui

Jan. 14 (Bloomberg) -- The Australian dollar may fall 11 percent against the British pound on an outlook for a deepening global slowdown, narrowing interest-rate advantage and rising foreign-exchange volatility, Commonwealth Bank of Australia said.

Australia’s biggest bank forecasts the Australian dollar, also known as the Aussie, will weaken to 41.29 pence by the end of this quarter, wrote Richard Grace, chief currency strategist at Commonwealth Bank in Sydney, in a research note yesterday. The bank’s prediction compares with a March-end median estimate of 44.10 pence in a Bloomberg News survey of analysts.

“The combination of downside risks to global growth, currency volatility and interest-rate differentials suggests a decline in the Aussie-pound exchange rate,” Grace wrote.

The Australian dollar rose to 46.27 pence at 4:01 p.m. in Sydney from 45.84 pence late in New York yesterday, when it reached 45.38 pence, the lowest level since Dec. 25. The 41.29 pence level was last seen on Nov. 21.

Australia’s currency may extend this month’s 3.9 percent loss as a government report tomorrow may show Australian employers cut workers for a second month in December, adding to signs a global slowdown is threatening to tip the nation’s economy into its first recession since 1991.

“A near-term decline in the Aussie-pound is consistent with our view that more poor global economic news will be forthcoming over the first quarter,” Grace wrote.

Yield Advantage Narrows

The Reserve Bank of Australia cut the benchmark interest rate last year by three percentage points to a match a record low of 4.25 percent to revive its economy. The Bank of England lowered its key rate by 4.5 percentage points over the past year to an all-time low of 1.5 percent.

The yield advantage of two-year Australian government bonds over similar-maturity U.K. debt narrowed to 1.04 percentage points today from 1.69 percentage points at the end of 2008, reducing the allure of Australian dollar-denominated securities.

The narrowing in the interest-rate differential between the two nations “suggests that the Aussie-pound should decline over the coming months,” Grace wrote.

Australia’s dollar also may weaken against the pound on speculation that volatility in the foreign-exchange markets may increase, according to CBA.

“Currency volatility is likely to remain elevated during the first quarter as central banks lean toward larger, rather than smaller, interest-rate reductions and toward sobering commentary on the economy,” Grace said.

Implied volatility on one-month pound options against Australia’s dollar declined to 23.07 percent from 23.17 percent yesterday. It earlier reached 23.19 percent, the highest level since Jan. 7.

To contact the reporter on this story: Ron Harui in Singapore rharui@bloomberg.net