The Australian dollar's rally thismonth will be short-lived as demand for the nation's chiefexport wanes with China stockpiling record amounts of iron-ore,according to Insight Investment Management Ltd.
Insight, a Bank of New York Mellon Corp. unit that overseesabout $456 billion, expects the Aussie to reach new lows "inthis cycle" as greater supplies of the nation's commodityexports weaken prices, according to Paul Lambert, London-basedhead of currency at the fund manager. The Reserve Bank said thismonth Australia's currency may fall with an expected drop in theworth of its export earnings. The Aussie may slide toward thelow 60 U.S. cent area in 2015, Deutsche Bank AG said.
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"The result of diminished demand and continued strongsupply will be a resumption of the downtrend of commodityprices," Lambert said in an e-mailed response to questions onFeb. 18. "This will worsen Australia's terms of trade. Giventhat we now know that terms of trade dominates the RBA'scurrency model, they would be hoping and expecting to see alower Australian dollar."
The Aussie is set for its first weekly slide in a monthafter a two-day drop in iron ore prices. Further declines in thecurrency will also be driven by falling mining investment andfiscal austerity at the same time as consumption is capped bydecade-high unemployment, Lambert said. While the Australiandollar has risen 3.8 percent from a 3 1/2 year low of 86.60 U.S.cents reached Jan. 24, it's down from a post-float record of$1.1081 that came in 2011.
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The currency has fallen 0.5 percent this week to 89.89 U.S.cents as of 12:51 p.m. in Sydney. Economists surveyed byBloomberg say it will probably fall to 85 cents by Dec. 31, alevel unseen since July 2010.
Total iron ore inventory at Chinese ports monitored byShanghai Steelhome Information Technology Co. climbed to 100.3million tons in the week ended Feb. 14, the highest in figuresgoing back to March 2010. Data from The Steel Index Ltd. showprices of the steel-making material dropped 1.2 percent over twodays to $122.90 a metric ton yesterday, after touching a seven-month low on Feb. 11. A Citigroup Inc. gauge of Australia'sterms of trade -- or export earnings relative to the import bill-- fell on Feb. 10 to the least since July.
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The stockpiling "makes us feel that strong demand will notbe maintained," Lambert said. Australian economic growth willprobably "moderate again as mining investment continues to wanein the second half of this year and private consumption remainssubdued against the background of a weak labor market."Price Correction
Westpac Banking Corp. said this week that the level ofinventories may suggest a destocking cycle around the corner,according to an e-mailed note from Senior Economist Justin Smirk. Destocking occurred in 2012, which led to a significantcorrection in iron ore prices, he wrote.
Reports this month showed retail sales growth slowed inDecember, while payrolls unexpectedly declined in January topush the jobless rate to 6 percent, the highest since 2003.Australian Treasurer Joe Hockey pledged spending cuts at the endof last year after forecasts that showed the deficit may widento A$47 billion ($42.2 billion) in the 12 months to June 30,from a previous A$30.1 billion shortfall estimate.
The impact of a weaker greenback on the back of recent,weather-hampered U.S. economic data will be temporary, accordingto Lambert. Expectations for the Federal Reserve to continuewith a reduction in stimulus and an eventual improvement in U.S.indicators provides room for the dollar to strengthen and itsAustralian peer to weaken in turn, he said.Policy Rift
Minutes of the Fed's January meeting released this weekpointed to a sustained decrease in the central bank's monthlybond purchases, which currently stand at $65 billion. InAustralia, policy makers left borrowing costs at a record-low2.5 percent this month and signaled a period of rate stability.
Deutsche Bank sees downside risks to its forecast for theAussie to fall to 75 cents by the end of 2015 as the divergencebetween U.S. and Australian monetary policy drives a"significant narrowing" in benchmark yield spreads, Sydney-based Adam Boyton, chief economist for Australia at the lender,wrote in an e-mailed note to clients today.
The extra yield Australian 10-year government bonds offeredover similar-maturity U.S. Treasuries was at 1.44 percentagepoints today, down from last year's high of 1.71 percentagepoints, according to data compiled by Bloomberg. The spread maynarrow to 25 basis points by early 2016, Boyton wrote.
"A firmer U.S. dollar and a resumption of the downtrend ofcommodity prices, combined with softer domestic data inAustralia, will take the AUD/USD exchange rate to fresh lows,"Insight's Lambert said.
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