BlackRock sees 15% Aussie drop on mining rout

[SYDNEY] The slump in resource export prices could drag the Australian dollar down as much as 15 per cent to about 70 US cents, according to BlackRock Inc.

Reduced income from commodities will make consumers more cautious and the gap between Aussie and US 10-year bond yields should narrow to about half a percentage point, said Stephen Miller, Sydney-based head of Australian fixed-income at the world's biggest money manager. The Reserve Bank of Australia is likely to keep its benchmark interest rate unchanged at a record-low 2.5 per cent through 2015, though a cut is more likely than an increase, he said.

BlackRock's prediction is lower than the median year-end forecast of 79 cents in a Bloomberg survey of analysts, after a global rout in commodities that pushed both copper and oil down about 9 per cent this month.

A private survey released on Sunday showed Australian consumer prices were unchanged in December. RBA policy makers, scheduled to meet Feb 3, will also weigh official inflation data due Jan 28 and a household confidence indicator coming tomorrow.

"I'm probably inclined to think that things could be weaker rather than stronger," said Mr Miller. "Just as the massive increase in the terms of trade meant that, unlike the rest of the developed world, Australia avoided a recession, massive declines in the terms of trade mean that we're going to struggle more than the developed world, and at the same time we've got Chinese growth coming off."

China, Australia's biggest trading partner, may report on Monday that its economy expanded 7.3 per cent in 2014, the slowest full-year pace since 1990, according to economists surveyed by Bloomberg.

The Australian currency has tumbled 12 per cent over the past six months to 82.18 US cents as of 5 pm on Monday in Sydney, and touched a 5 1/2-year low of 80.33 cents on Jan 7. Mr Miller had previously predicted the currency would fall to 80, reiterating that call last March when it was at about 90.

The Aussie dollar has declined 6.8 per cent over the same period on a trade-weighted index. Weakness against a range of currencies is preferable to a drop only against the greenback, Miller said in an interview in Sydney.

Yield Premium The yield on 10-year Australian bonds was 2.63 per cent, with the premium over equivalent US securities falling to 80 basis points from 121 in October.

Miller sees the yield in a range of 2.5 per cent to 3 per cent, with a "very modest compression" stemming largely from higher US rates. A 10-year Treasury yield of 2 per cent to 2.5 per cent isn't inconsistent with a higher Federal Reserve cash benchmark of 50 or 75 basis points, he said. The Treasury yielded 1.84 per cent at the end of last week.

Swaps traders see a 25 per cent chance that the RBA will cut its cash target by a quarter point at its upcoming meeting, with a 70 per cent chance of a reduction by the middle of this year, according to data compiled by Bloomberg. Just three of 24 economists surveyed by Bloomberg are forecasting a February cut. Eleven concur with BlackRock in seeing no change to the benchmark throughout 2015.

"I don't think the Reserve Bank are chewing at the bit to try and institute a rate cut," Mr Miller said.

While markets for Australia's largest exports have been roiled and confidence measures are languishing, there have been positive signs for the economy. Employers boosted payrolls in November and December by the most in any two-month period in the past eight years and the unemployment rate dropped to 6.1 percent, the Australian Bureau of Statistics said last week.

"I am skeptical about the quality of the labor force numbers issued by the ABS, but that's two strong ones in a row now and even if I'm skeptical, you want to be cautious about dismissing two strong numbers in a row," Mr Miller said. The RBA will "take heart from those employment numbers and I think they'll take heart too from the decline we've seen in the exchange rate, albeit that it's my expectation that they'd want to see more," he said.

Within Australian bond markets, Mr Miller sees state government debt providing an opportunity for investors because of the extra yield above federal notes. He said he is neutral to slightly overweight on corporate credit.

"Credit in the investment grade space can probably hold its own," he said. "The best you're going to do this year is to get your carry, I wouldn't be looking for capital gains."

BLOOMBERG