By Oliver Biggadike and Candice Zachariahs
Jan. 11 (Bloomberg) -- The biggest monthly rebound in the Dollar Index since January means faster gains for Australia’s and Canada’s currencies as the recovering U.S. economy boosts demand for their commodities.
The Canadian and Australian dollars will strengthen to trade at parity with the greenback or better together in 2010 for the first time in 34 years, appreciating at least 2.6 percent and 7.4 percent, three of last year’s four best forecasters for both currencies say. Traders are favoring the so-called loonie and Aussie over the dollar on the Chicago Mercantile Exchange even while betting more than ever on the Dollar Index advancing.
Accelerating U.S. growth will spur demand for Canadian oil and natural gas as China’s expansion boosts purchases of Australian iron ore and coal, pushing both currencies higher, said Sacha Tihanyi, a foreign-exchange strategist in Toronto at Bank of Nova Scotia. The loonie and Aussie both rose last week even as the People’s Bank of China took steps to curb lending.
“The global economy is going to strengthen, and the recovery is going to broaden out from what has so far been a China-, Asia-led global recovery,” said John Kyriakopoulos, head of currency strategy in Sydney at National Australia Bank Ltd., the most accurate predictor for both currencies last year.
“We’re forecasting parity for the Aussie dollar, and we actually think the Canadian dollar will go through parity” by March, he said. The bank is the most bullish of last year’s most accurate forecasters on the two currencies, predicting gains of about 11 percent for each by Sept. 30.
Most Since 2007
The Australian dollar rose 0.7 percent to 93.16 U.S. cents as of 2:15 p.m. in Sydney and was 2009’s third-best performer among the 16 most-traded currencies. Canada’s loonie, nicknamed for the aquatic bird on its dollar coin, advanced 0.4 percent to C$1.0260, after gaining the most since 2007 last year.
IntercontinentalExchange Inc.’s Dollar Index -- a gauge against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- has rallied 3.7 percent since Nov. 25 after a 16.7 percent slide from 2009’s March 5 closing high.
Three of the four best loonie forecasters in 2009 -- National Australia, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co. -- predict parity by June 30; the other, Canadian Imperial Bank of Commerce, sees it there by Dec. 31.
As for the best Aussie predictors, National Australia says that currency will equal the greenback by March 31; CIBC sees it there by year-end; JPMorgan estimates it will be stronger than parity in the second quarter and Commonwealth Bank of Australia is calling for it to stop 2 cents short of one U.S. dollar.
Biggest Gains
Of the most active currencies, the Aussie, loonie, Brazilian real, Norwegian Krone, South African rand and New Zealand dollar, known as commodity currencies, posted 2009’s biggest gains against the dollar. The Reuters/Jefferies CRB Index of raw material prices had its best performance since 1979, gaining 23.5 percent.
History shows that a U.S. recovery coincides with increases in commodities, the Aussie and loonie.
After the U.S. came out of the 2001 recession, the currencies rose 48 percent and 23 percent, respectively, in the two years ending with 2003 as the world’s biggest economy expanded almost 6 percent. After falling 31 percent in 2001, the Standard & Poor’s GSCI Index of 24 commodities rose 39 percent and 11 percent in the next two years.
The Australian and Canadian dollars have rallied about 49 percent and 27 percent from last year’s lows as U.S. growth rebounded to 2.2 percent in the third quarter after shrinking 6.4 percent in the first.
Economic Forecasts
The U.S. economy’s expansion will accelerate to 2.6 percent in 2010, compared to 3.1 percent for Australia and 2.55 percent for Canada, according to the median estimates in Bloomberg economist surveys. Goldman Sachs Group Inc. predicts the S&P GSCI Enhanced Total Return Index of commodities will gain 17.5 percent this year.
“A lot of the Canadian dollar gains up to now have been happening in the absence of strong growth in the U.S.,” said Tihanyi of Bank of Nova Scotia. “Through this year, you’re going to see growth come back to what you might see in a normal year, and along with that you’re going to see a pickup in trade and demand for Canadian products.” Canada’s third-largest lender forecasts parity by June 30.
The Canadian dollar rose versus the greenback for a fourth day on Jan. 5, when the U.S. Commerce Department reported that automakers increased sales in December. The loonie climbed again the next day for its longest winning streak in two months.
Record Lending
The Canadian and Australian dollars are gaining support from the global recovery as China’s central bank tries to curb record lending. The nation may have exceeded its 8 percent growth target for 2009 by 0.5 percentage point, said Zhang Xiaoqiang, deputy head of the National Development and Reform Commission, in a Jan. 5 statement.
Commonwealth Bank of Australia, among the five most- accurate forecasters for the Aussie and loonie, expects both currencies to end 2010 short of parity after peaking in the second quarter as Federal Reserve interest-rate increases add to the greenback’s appeal. Median Bloomberg survey forecasts see the Australian dollar falling 3.4 percent by Dec. 31 as the Canadian currency drops 5 percent.
“The U.S. dollar will strengthen in anticipation of rate hikes,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank.
Canadian policy makers will warn traders against pushing the loonie higher to prevent damage to the economy, said Sebastien Galy, a foreign-exchange strategist at BNP Paribas SA in New York.
‘Pretty Vociferous’
“The problem with the Canadian dollar is the reaction function of the central bank; they’ve been pretty vociferous about talking down the currency,” Galy said.
Seven days after the loonie reached C$1.0207 on Oct. 15, its closest brush with parity since July 2008, Bank of Canada Governor Mark Carney said action to weaken the currency “is always an option.” Within two weeks, it fell 6.1 percent to a one-month low of C$1.0870. Measured in U.S. cents, Canada’s dollar hit 97.97 before falling to 92.
For the Aussie, the risk is a pause in rate increases. Reserve Bank of Australia Deputy Governor Ric Battellino described its monetary policy on Dec. 16 as “back in the normal range” because lenders had raised rates more than the policy makers had.
Weighing on Aussies
“Any paring back of those interest-rate hike expectations will weigh on the Aussie,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney, who sees the currency peaking at 93 U.S. cents. “A sooner and stronger-than- expected recovery in the U.S. is going to benefit Canada more than the likes of Aussie.”
Currency strategists have pushed up first-quarter forecasts for the Australian dollar, with the median prediction now at 93 U.S. cents, from 65 cents in March, more than estimates for the New Zealand dollar, real, krone, ruble and Canadian dollar.
Futures traders are becoming more bullish about the loonie and Aussie even as they increase bets on the U.S. dollar, data from the U.S. Commodity Futures Trading Commission show. Contracts profiting from gains against the greenback outnumbered bearish wagers by more than 40,000 on each currency last week, the most in five weeks for the Aussie and 10 for the loonie.
Investors had an unprecedented 51,050 bets that the Dollar Index would rise as of Dec. 29, according to the CFTC data. Even after such wagers fell to 48,623 last week, bullish contracts outnumbered bearish ones by more than 5 to 1, the most since March, when the dollar started last year’s slide.
Major Exports
Canada sits on the largest pool of oil reserves outside the Middle East. The nation is also the world’s third-largest exporter of natural gas after Russia and the U.S., according to the Energy Information Administration.
Australia is the biggest shipper of iron ore and coal. Merchandise exports to China, the nation’s largest trading partner, grew 29 percent in 2009’s first 11 months from the same period in 2008. Australia also sells gold, crude oil and liquefied natural gas.
The Aussie and the loonie last traded at parity together in 1976, before the November election of a secessionist Parti Quebecois government in Quebec helped trigger “a protracted selloff” in the Canadian dollar, according to James Powell’s “A History of the Canadian Dollar” on the Bank of Canada’s Web site.
Past Parity
The loonie most recently had the same value as an American dollar in July 2008 after rising to that level in September 2007 for the first time in three decades. It hit its strongest level of 90.58 Canadian cents per U.S. dollar two months later. The Aussie last reached parity in 1982, before the government allowed it to float freely the following year.
With the U.S. dollar showing renewed strength, Barclays Plc’s wealth management unit is advising investors to maximize returns on bets that the Aussie and loonie will rise along with commodity prices by purchasing the currencies with yen.
“If you had to pick a country in the world that’s most short of commodities, it’s Japan,” said Aaron Gurwitz head of global investment strategy at Barclays Wealth in New York.
To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.
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