By Candice Zachariahs and Wes Goodman
Nov. 2 (Bloomberg) -- Australia’s dollar is heading toward parity with the U.S. currency for the first time as investors hungry for China’s economic growth buy into the world’s biggest exporter of iron ore used in making steel.
The so-called Aussie has soared 35 percent the past 12 months, more than any other currency tracked by Bloomberg. Citigroup Inc., Calyon, Barclays Capital and National Australia Bank Ltd. forecast it will trade at 1 U.S. dollar next year, implying an additional 11 percent gain. Hedge funds and other large traders have more bets than anytime since July 15, 2008, that the rally will continue, data from the Washington-based Commodity Futures Trading Commission show.
China expanded 8.9 percent in the third quarter, the fastest pace in a year, fueling demand for Australia’s exports of iron ore, wool, coal and wheat. Reserve Bank of Australia Governor Glenn Stevens last month became the first Group of 20 policy maker to raise interest rates this year to curb inflation. He will increase them again tomorrow, according to all 22 economists surveyed by Bloomberg News.
“Australia will benefit from its trade relationship with Asian economies, especially China,” said Masataka Horii, one of four investors for the $48 billion Kokusai Global Sovereign Open, Asia’s biggest bond fund. “They export iron, gold, copper -- everything that China wants to buy. Domestically, Australia is very healthy. The central bank may continue to raise rates.”
Raising Holdings
Kokusai Global Sovereign increased its holdings of Australian dollar-denominated securities to a record 8.8 percent of assets this year from 1.1 percent at the end of 2008, according to Horii.
While the yuan has remained almost unchanged at about 6.83 to the dollar since July 2008, trading in some Australian financial markets has increased. Monthly volume in three-year bond futures, the most active contract on the Sydney Futures Exchange, reached 2,824,442 contracts in June, the most since September 2008, when the collapse of Lehman Brothers Holdings Inc. led investors to flee currencies such as the Aussie.
Stevens raised the overnight cash rate target to 3.25 percent from 3 percent in Sydney on Oct. 6, and will boost it to 3.5 percent when policy makers meet tomorrow, according to 18 of 22 economists surveyed by Bloomberg News. The remaining four expect a 0.5 percentage-point increase.
‘Imprudent’ Policy
In lifting rates last month, Reserve Bank policy makers concluded that a “very expansionary setting of policy was no longer necessary, and possibly imprudent,” according to minutes of the meeting. Gains in the dollar “may help contain inflation,” they said.
Australia’s economy will grow 1.5 percent in the 12 months ending June 30, 2010, compared with a May prediction of a 0.5 percent contraction, Treasurer Wayne Swan told reporters today in Canberra. The central bank is due to publish revised economic forecasts on Nov. 6.
Swaps traders are betting the benchmark rate will increase almost 2 percentage points over 12 months, according to a Credit Suisse Group AG index. Federal funds futures indicate a better than 50 percent chance the U.S. central bank will raise its key rate to 1 percent from its current range of zero to 0.25 percent, allowing traders to continue to borrow in the U.S. and invest the money in nations such as Australia with higher rates.
‘Go Above $1’
“The Aussie will go above $1 and probably stay there for a while,” said Dale Thomas, head of currencies in London at Insight Investment Management Ltd., which oversees about $195 billion. “The RBA in their speeches are just acknowledging the facts of life: The nature of what Australia does has changed, it’s an Asian economy now. It’s a commodity producer to Asia, not an agricultural product producer to the U.K., which it was 30 years ago.”
The U.K. relinquished its post as Australia’s biggest export market in the mid-1960s and is the fifth-largest buyer of the nation’s overseas shipments this year, government data show.
Exports account for about a fifth of the economy, which has expanded this year after shrinking in the three months ended Dec. 31, the first contraction since 2000. Australia is the world’s biggest iron-ore supplier and the International Wool Textile Organization in Brussels says the country is the globe’s largest producer. It also sells gold, crude oil, coal and wheat.
China, the world’s fastest-growing major economy, is Australia’s second-biggest trading partner, accounting for 13 percent of total trade in 2008, Foreign Minister Stephen Smithsaid Oct. 26. The nation’s 4 trillion-yuan ($586 billion) stimulus package has sparked record imports of iron ore, which grew to 64.55 million tons in September from 32.65 in January, according to the China General Administration of Customs.
Rally Interrupted
China’s manufacturing expanded at the fastest pace in 18 months in October. The Purchasing Managers’ Index rose to a seasonally adjusted 55.2 this month from 54.3 in September, the Federation of Logistics and Purchasing said yesterday in an e- mailed statement in Beijing.
“Australia’s trade links with Asia, and in particular China, have been an important factor,” in keeping the economy from entering recession, Reserve Bank of Australia Assistant Governor Philip Lowe said in an Oct. 19 speech in Sydney.
While Australia’s dollar depreciated 2.5 percent last week it traded at 90.07 U.S. cents as of 11:30 a.m. in Tokyo, up from 66.78 U.S. cents a year ago. Its performance is the best of any of the 171 currencies tracked by Bloomberg. On Oct. 16, Westpac Banking Corp., Australia’s largest lender, raised its year-end forecast to 98 U.S. cents from 88 U.S. cents. Strategists at New York-based Goldman Sachs Group Inc. said Oct. 29 they are targeting 95 U.S. cents.
Inflation Outlook
“We continue to like the Australian dollar and see it as one of the clearest beneficiaries of the commodities-price outlook, on which we remain constructive,” the Goldman strategists, including Thomas Stolper in London, said in a report.
Stevens is banking on a combination of a rising Australian dollar and higher interest rates to curb inflation.
Core inflation in Australia was at 3.8 percent in the third quarter, fueled by electricity and gasoline costs, based on the central bank’s weighted-median measure. The Reserve Bank aims to keep increases to between 2 percent and 3 percent.
The appreciating Aussie may be starting to drive business away from the nation. Warner Bros. decided in October to abandon shooting its “Green Lantern” superhero movie in Sydney, according to a statement from Screen NSW, which cited “fluctuations in currency valuation.”
Hurting Earnings
Chris Pidcock, a strategist at Goldman Sachs JBWere Pty., the affiliate of the world’s most profitable securities firm based out of Sydney and Melbourne, estimates about 35 percent of publicly traded Australian companies are affected by the Aussie’s gains.
Sims Metal Management Ltd., the world’s biggest recycler of scrap metal, said in its annual report that each 10 percent increase in the Aussie reduces post-tax profit by A$3.8 million ($3.42 million). Sims had a A$150 million after-tax loss in fiscal 2009 ended June 30. BlueScope Steel Ltd., Australia’s largest steelmaker, said in August that it swung to a loss of A$473 million in the six months ended June 30 in part because of the stronger Australian dollar.
Morgan Stanley calculated in an Oct. 29 report to clients that Australia’s dollar is 36 percent overvalued, more than any other Group of 10 currency. The firm said gains may be “capped” at 94 U.S. cents, with any appreciation above that putting the Aussie in “unprecedented overvaluation” territory.
Government officials show little concern. Swan said Oct. 14 that the country’s floating exchange rate is “one of those facts of economic life that comes in an international economy.”
Canada’s Concern
Australia’s tolerance of a stronger currency contrasts with governments and central bankers from Canada, Europe, Brazil, Colombia, South Korea and New Zealand. They have voiced concern and some implemented policy measures to restrain the strength of their legal tender against the U.S. dollar.
Mark Carney of the Bank of Canada warned Oct. 20 that the economic recovery was threatened by a stronger Canadian dollar, spurring the biggest decline in the currency in four months.
Brazil’s real dropped after Luiz Inacio Lula da Silva’s government said it would impose a 2 percent tax on foreign purchases of stocks and bonds to curb this year’s best- performing currency after the Seychelles rupee.
There are few hurdles for the Aussie to trade at the same level as the U.S. dollar for the first time in history, according to David Forrester, a currency economist in Singapore at Barclays. The firm forecast Oct. 16 that the Aussie will reach parity in six months.
Testing Parity
The central bank’s approach “creates a path of least resistance in terms of policy makers and currency strength,” Forrester said.
Australia’s dollar tested parity last year, peaking at 98.50 on July 15, 2008, the strongest since it began trading freely in 1983. It then tumbled 29 percent through the end of that year as Lehman’s collapse froze credit markets and prompted investors to dump all but the safest government assets, such as U.S. Treasuries.
Strategists are having a hard time keeping up with the currency’s rally. The median of 36 estimates in a Bloomberg News survey is for it to end the year at 90 cents. The forecast has increased every month since March.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the Australian dollar compared with those on a drop -- so-called net longs -- was 53,990 on Oct. 20, before easing back to 52,887 on Oct. 27, CFTC data based on contracts at the Chicago Mercantile Exchange show. That compares with net shorts of 19,462 in September 2008.
“Critical markets like China, South Korea, East Asia, India and so on are still exhibiting the requisite strength to underpin the fundamentally positive story about the Aussie dollar,” said Stephen Miller, a managing director in Sydney at BlackRock Inc., which oversees $1.4 trillion.
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
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