Aussie dollar plunge expected to continue

Tokyo

NOT since 2009 has Australia's dollar tumbled so far in the first month of the year. And the world's biggest foreign-exchange trader says the pain is far from over.

After tumbling 5.1 per cent in January, the so-called Aussie will fall an additional 3.6 per cent in three months to 75 US cents, Citigroup Inc forecasts.

Money-market traders give better- than-even odds that the Reserve Bank of Australia will cut interest rates on Tuesday to stimulate an economy ravaged by the commodities slump, damping the appeal of the nation's financial assets to global investors.

"The market is increasingly pessimistic on the RBA," Todd Elmer, a strategist at Citigroup in Singapore, said on Jan 29. "I doubt that even if the RBA is relatively hawkish, investors are going to back down from this expectation for easing."

Australia is struggling with the end of a once-in-a-century resources boom and a slowdown in China, which buys more than a third of its exports. RBA governor Glenn Stevens has been trying to talk down the Aussie for months to make the economy more competitive, and identified 75 US cents as his preferred exchange rate in a Dec 12 interview with the Australian Financial Review.

The Aussie started weakening in September, and since then has lost 17 per cent against its US counterpart. It touched a five-and-a-half-year low of 77.20 US cents on Jan 29.

The currency moved up and down in a tight band throughout the day on Monday. In late trade, it was fetching 77.83 cents, compared with just above 77.90 cents at the same time on Friday.

Options traders are gearing up for further losses. It costs 2.05 percentage points more to protect against declines in the Aussie versus the US dollar for one month than to do the same for gains, according to data on risk reversals compiled by Bloomberg. That's the biggest premium since August 2013.

"The Aussie is in the middle of its period of weakness," Eric Stein, who oversees about US$13 billion at Boston-based Eaton Vance Corp, said on Jan 29.

He cited "structural weakness in the Australian economy, the fall in iron-ore prices, and the slowdown in the Chinese economy" as well as "general US dollar strength" as the Federal Reserve prepares to raise its benchmark rate. He forecasts a decline in the Aussie to 75 cents, without giving a timeframe.

A Deutsche Bank AG index tracking the prices of commodities important to Australia has tumbled 31 per cent in the past year.

Growth will slow to 2.6 per cent in 2015, after growing at a 2.7 per cent annual pace in the third quarter of 2014, economists surveyed by Bloomberg predict.

A Chinese manufacturing gauge unexpectedly signalled contraction in January for the first time in more than two years, an official report on Sunday showed.

While swaps traders are pricing in an Australian rate cut on Tuesday, that's not the consensus among analysts: 21 of 27 economists surveyed by Bloomberg predict no change this week.

The RBA has kept rates on hold for 17 months - the longest period in almost two decades. Mr Stevens himself has played down the prospect of cuts, telling the AFR in December that high borrowing costs aren't "really the problem".

"The RBA wants to support the economy via a weaker currency rather than by cutting rates," Yukino Yamada, a strategist at Daiwa Securities Co in Tokyo, said on Jan 29. "The market has been overly aggressive in pricing in further easing. Downside in the Aussie will be limited from here."

Swaps prices suggest a 57 per cent chance the RBA will reduce Australia's main rate from a record-low 2.5 per cent at its first policy meeting of the year, up from 27 per cent odds at the end of December, data compiled by Bloomberg show.

Even if there's no cut on Tuesday, traders are positioned for 0.58 percentage point of rate reductions over the next 12 months, according to a Credit Suisse Group AG swaps index.

By easing policy, the RBA will join central banks from the euro region to India, Canada and Russia which took action this year to boost growth and stave off deflationary pressures. The additional stimulus across much of the globe contrasts with the Fed's plans to raise borrowing costs this year, which has fuelled demand for US dollars.

The Aussie is headed lower with or without rate cuts from the RBA, according to Joseph Capurso of Commonwealth Bank of Australia, the nation's biggest lender. "The most important reason we're so negative on the Aussie is we think the US dollar has more upside," he said in Sydney on Jan 29. "The Aussie will be down to 72 cents before the middle of the year." BLOOMBERG