Sunday, July 27, 2008

Australia Dollar Peak Pushes Traders to Yen on Slowing Economy

By Wes Goodman and Stanley White

July 28 (Bloomberg) -- Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1, compared with 95.62 U.S. cents on July 25, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 2.

``The rally is finished as the best days for the economy may be over,'' said Tsutomu Komiya, a money manager in Tokyo at Daiwa, a unit of Japan's second-largest brokerage. Daiwa, which manages the equivalent of $93 billion, isn't buying the currency because cash flowing into Australia funds ``has stopped in recent days,'' he said.

Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments are also turning into bears as the U.S. economic slowdown spreads, curtailing the rally in coal, oil and metals that fueled Australia's expansion. Lehman Brothers Holdings Inc., which recommended the currency in February, now predicts it will depreciate 21 percent by 2009.

The Aussie gained 9.3 percent against the greenback this year, lagging behind only the Brazilian real and the Swiss franc among the 16 most-traded currencies, according to data compiled by Bloomberg. It touched 98.5 cents on July 16, the highest since 1983. The Australian dollar soared 44 percent over the past five years, on demand from China for the country's coal, iron ore and nickel.

Record Exports

Commodities exports were poised to set a record for the fourth-straight year in the 12 months to June 30, 2008, reaching A$145.6 billion, the government's Australian Bureau of Agricultural and Resource Economics said in March.

The $1 trillion economy is slowing after the central bank increased its target interest rate to a 12-year high of 7.25 percent in March to stem inflation. Home loan approvals fell by the most in eight years in May and consumer confidence slumped to a 16-year low this month. Growth may decelerate to 2.95 percent this year from 4.23 percent in 2007, according to the median estimate of 14 economists surveyed by Bloomberg News.

Australia's dollar slumped 1.4 percent last week, even after a government report showed consumer prices climbed 4.5 percent from a year earlier, the most since 2001.

Cooling Economy

The Reserve Bank of Australia increased its target rate 12 times from 4.25 percent in April 2002 to curb inflation. Governor Glenn Stevens will cut rates by 0.25 percentage point at least once in the coming 12 months, a Credit Suisse Group index shows.

The Aussie will slide 4.8 percent this year to 91 U.S. cents, according to the median of 30 currency strategist forecasts in a Bloomberg survey. Lehman predicts 85 U.S. cents as commodity prices fall and losses linked to subprime mortgage defaults slow global growth.

``Parity is out of the question,'' said Akira Takei, the general manager for international bonds at Mizuho in Tokyo, part of Japan's second-largest publicly traded bank. ``For the past several years, people were eager to take risks. Now things have changed as the U.S. subprime issue spills over into other regions. The Australian dollar will be sacrificed.''

Mizuho, which oversees the equivalent of $37 billion, sold last week. The currency may fall to 85 cents this year and 75 the next, Takei said.

Yen to `Soar'

The biggest beneficiary of a weaker Aussie may be the yen. Australian dollar securities rose to 12 percent of Japanese overseas investments between November and April, compared with an average of 6 percent since 2005, according to Japan's Ministry of Finance. Investors took advantage of the difference between Australia's interest rates and Japan's, where the benchmark borrowing cost is 0.5 percent.

As Japanese bring home proceeds of their sales, the yen will gain 1 percent this year after closing last week at 107.84 to the U.S. dollar, a separate Bloomberg survey showed.

``The yen should broadly soar if commodity prices were to fall,'' Taisuke Tanaka, Lehman's chief Japan currency strategist wrote in a July 17 report.

Japanese individuals already started to reduce bets, according to figures from the Tokyo Financial Exchange Inc. Net long positions that the Australian dollar will gain against the yen fell to 39,449 contracts on July 22, less than half the record of 79,920 contracts on July 1.

Trade Balance

Investors should be wary of betting too soon on the yen, according to UBS AG, the world's second-biggest foreign exchange trading firm. Japan's exports fell in June for the first time in more than four years as demand for cars and electronics dropped, the Finance Ministry reported last week. The yen and the trade balance have consistently moved together over the last couple of decades, UBS said.

``The downside risks to Japan's currency are growing sharply,'' said Mansoor Mohi-uddin, a Zurich-based strategist at UBS, in a research note on July 25.

The Aussie remains the favorite of Kokusai Asset Management Co. because of growth in China's economy, which is expanding at an annual rate of more than 10 percent, said Masataka Horii, one of four investors for the firm's $53 billion Global Sovereign Open fund in Tokyo.

``Australia will profit from China,'' said Horii. ``Its economy is relatively better than that of Japan or the U.S.''

Australia & New Zealand Banking Group Ltd., the country's third-biggest bank, predicts the currency will rise to $1.04, after reaching parity for the first time since 1982.

Commodity Impact

Australia relies on raw material exports for 9 percent of its economy, ranking behind Gulf Arab states, Chile and Russia, according to research by Morgan Stanley.

Investors started to question the outlook for Australia after oil prices tumbled 15 percent since reaching a record on July 3 on concern demand from the U.S., Japan and China will wane. Gold fell 5 percent from this month's high as the drop in fuel prices gave investors less need for the metal as a hedge against inflation.

Gold, Australia's biggest raw-material export after coal and iron ore, may drop to $825 in 2010 from $924 now, according to a Bloomberg survey of 11 analysts. Crude oil, the No. 4 raw- material export, may slump to $112 a barrel in 2010 from $124, a separate survey shows. China's economy grew 10.1 percent in the second quarter from a year earlier, compared with the 11.9 percent pace in 2007.

`Too Expensive'

``Oil and commodities are too expensive,'' said Kensuke Niihara, head of foreign-exchange management in Japan at State Street, which manages $100 billion in assets worldwide. ``Within this year, there is good potential the Australian dollar will come down.''

Putnam, which forecast the Aussie would reach 95 U.S. cents when it was trading at 88 cents on Jan. 10, is also turning negative.

``We've been bullish the Australian dollar all year long but we have reduced some in the last few weeks,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president in Boston. ``If you believe we're in a period of weaker global growth then it would seem the Australian dollar has some risk of falling.''

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