Aussie dollar sliding toward 60 US cents in Citigroup's 1998 redux

[SYDNEY] If you want to know what lies ahead for Australia's dollar look back to 1998, according to Citigroup Inc, the world's largest currency trader.

Just as the Aussie was weighed down in the final years of the last decade by equity market jitters and sliding commodity prices, the currency will again fall in tandem with raw materials and slide toward 60 US cents in this downtrend, said Thomas Fitzpatrick, a managing director for currency strategy at Citigroup. It traded at 72.09 US cents as of 11.09am in Sydney on Thursday, having fallen 1.2 per cent in the five days through Wednesday as the Bloomberg Commodity Index dropped 2.2 per cent.

"When you look at Australia, the dynamics that are probably likely more important are the commodity complex itself and what commodities will do," Fitzpatrick said. "When the dust settles and that might take some time, we're going to see an Australian dollar closer to 60 cents than to 70 cents."

The Aussie has rallied 2.7 per cent this month as prices of iron ore, the nation's chief export, stabilised and the Federal Reserve delayed raising interest rates. Australia's currency came under pressure again this week when China, its biggest trading partner, reported slowing growth in industrial production and fixed asset investment.

A further deceleration in the commodity intensive part of the Chinese economy spells trouble for Australia. Already, a drop in mining investment and slumping raw material prices have convinced the Reserve Bank of Australia to reduce its benchmark rate by 2.75 percentage points since November 2011 to a record 2 per cent. Swaps markets now indicate a 70 per cent chance policy makers will cut again by the end of March 2016.

LOOKING BACK

China said on Monday economic growth slowed to 6.9 per cent last quarter from a year earlier, matching that for the three months through June 1998. Back then, Asian equities slumped 23 per cent in six months and Russia suffered a currency crisis, prompting the Fed to cut rates three times. When economic growth in the world's largest economy stayed on track, policy makers reversed course by the middle of 1999, raising the fed funds rate six times during the next year, boosting the US currency.

"The Fed did move toward a tightening cycle, commodities did not fully bottom out in that cycle until really into later in 1999 and as a consequence, the Australian dollar did push down," Fitzpatrick said while attending an investment conference organised by Citigroup.

The Aussie tumbled 6.2 per cent in 1998, recovered in the first half of the following year and then went back into decline in the second half and through most of 2000, when it lost 15 per cent.

The Fed's reaction has been similar this year. A rout in global equities spurred it to maintain near-zero benchmark rates in September and disappoint those predicting the first tightening since 2006. For US policy makers, the issue now is getting the timing right, Mr Fitzpatrick said.

"Unless things get significantly worse again, June seems too far down the line because there's no way these dynamics are nearly as bad as we saw in 1998," he said. The timing of a Fed move "probably shifts to the first quarter of next year."

A stronger US dollar, a weaker China and slumping commodity prices will send the Australian dollar back into decline, he said. "We feel there's quite a decent way still to go on that, but that could be easily 12-plus months out."

BLOOMBERG