Tags: Australian | Dollar | Peaking | Tax | Overvalued | gillard

Australian Dollar Peaking as Tax Proves Currency Is Overvalued

Monday, 20 Sep 2010 08:29 AM

Australia’s dollar, this quarter’s best performing major currency, is now the most overvalued.

Purchasing power parity, a measure of the cost of goods relative to other countries, shows the so-called Aussie is 27 percent too expensive, according to data compiled by Bloomberg. The median estimate of strategists and economists is for Australia’s dollar to weaken 6.5 percent by year-end, the fourth-worst performance of 31 currencies tracked by Bloomberg.

While Australia’s dollar has soared 12 percent since June, benefitting from its ties to China’s economy, traders speculate new Prime Minister Julia Gillard’s planned tax on mining companies will damp demand for the nation’s assets at the same time global economic growth decelerates. The nation’s mining industry has enjoyed a record investment boom to feed Chinese demand for iron and coal.

“If I were to pick a currency to have my money in for the next month, it would be Australia’s, but after a month I’d pick something else, like the U.S.,” said John Taylor, who oversees about $9 billion as chairman of FX Concepts LLC in New York.

Momentum in the Aussie may lead it to test its record high of 98.50 U.S. cents next month before depreciating to the low 80-cent level by early 2011, Taylor said. That’s when a slowdown in global growth will prompt investors to seek safety in the U.S. dollar, he said. The currency rose 0.5 percent to 94.12 cents as of 11:29 a.m. in Tokyo, after strengthening for a fifth-straight week in the five days to Sept. 17, the longest winning streak since the period ended Sept. 25, 2009.

‘Greater Risk’

“At these levels, there’s a lot of good news in the price for the Aussie,” said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd., in London. “There’s greater risk of disappointment.”

The median estimate of strategists and economists surveyed by Bloomberg is for the currency to weaken to 88 U.S. cents by year-end. The forecast is the same as in early July, even though the Aussie has risen from about 84 cents.

Of the 31 major currencies tracked by Bloomberg, only three are forecast to do worse than Australia’s dollar: the Czech koruna, Danish krone and Swedish krona.

Investors are awaiting final details of a planned tax which the government estimates will result in BHP Billiton Ltd., the world’s largest mining company, Rio Tinto Group., the third biggest, and the rest of the nation’s coal and iron ore companies paying an extra A$10.5 billion in tax in the first two years.

‘Jewel in the Crown’

Australian Treasurer Wayne Swan signaled on Sept. 8 that final terms of the government’s planned mining tax may depend on talks with independent lawmakers. Gillard held on to power on Sept. 7 as the nation’s first female prime minister after independent lawmakers and the Greens Party agreed to help her govern following a deadlocked Aug. 21 election. Greens leader Bob Brown said Sept. 15 his party wants to increase the proposed levy and expand it to include uranium.

While the Aussie “has a lot of good things going for it,” the mining tax “is something that every investor has been watching,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “Anything that hampers the jewel in the crown is going to catch a lot of attention.”

Australia’s dollar has become a favorite for traders because of the nation’s relatively high interest rates. The nation’s central bank has raised its benchmark borrowing rate to 4.5 percent from 3 percent over the past 12 months, as the Federal Reserve and European Central Bank kept theirs unchanged.

Surpassing Switzerland

The Aussie has passed the Swiss franc to become the world’s fifth most-traded currency according to the Bank for International Settlements’ Triennial Central Bank Survey released Sept. 1. It accounts for 7.6 percent of daily trading though Australia is 1.6 percent of world gross domestic product.

Twenty percent of Australia’s economy depends on exports, led by iron ore and coal to countries including China, the nation’s largest trading partner. Links with fast-growing economies helped it skirt a global recession and expand 1.2 percent last quarter, the fastest pace in three years, driving the jobless rate down to almost half the level of the U.S.

Australia’s currency may maintain its gains as long as the Fed and the ECB keep benchmark rates at record lows to nurse their economies’ recovery, according to Christoph Kind, head of asset allocation at Germany’s Frankfurt-Trust, which manages about $20 billion. He has an “overweight” position on the currency, meaning he expects it to outperform.

‘Breathtaking’ Performance

“The past performance of the Aussie dollar has been breathtaking and every attempt to go short on the currency always failed,” said Kind. “I don’t see an immediate turnaround as long as U.S. growth remains weak.”

Futures traders have increased bets that Australia’s dollar will gain against its U.S. counterpart, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance compared with those on a drop was 56,669 on Sept. 14, up from 7,246 on July 6.

The Aussie reached a two-year high against the greenback on Sept. 17 amid speculation the Fed will increase the supply of dollars to buy Treasury securities to keep borrowing costs low and sustain growth, a practice known as quantitative easing.

U.S. central bankers are scheduled to meet tomorrow to decide monetary policy. A survey by Jersey City, New Jersey- based Ried Thunberg ICAP of money managers overseeing $1.34 trillion found that 43 percent of respondents expect the Fed to announce renewed quantitative easing; the rest don’t.

Paring Bets

Fed purchases of additional securities may ultimately be bad for Australia’s dollar because it would signal that global growth is slowing, leading traders to decrease their bullish bets on the currency and seek havens, according to Joseph Capurso, a foreign-exchange strategist at Commonwealth Bank of Australia. The Sydney-based bank is the nation’s largest lender.

“More U.S. quantitative easing means a weak U.S. economy,” he said. “Ultimately, that’s a softer world economy, which makes it hard for commodity prices and commodity currencies to go up. It’s a difficult environment for Aussie.”

The International Monetary Fund’s John Lipsky, the agency’s second highest-ranking official, said last week in a speech the global economic recovery “has slowed somewhat.” Australia’s currency weakened 9.5 percent amid the worldwide recession in 2008, its worst performance since 1997, according to Bloomberg Correlation-Weighted Currency indexes.

Growth in Europe may falter as nations including Greece, Spain and Portugal trim spending after a budget deficit crisis forced European officials to craft a 750 billion euro ($979 billion) aid package in May. The region’s growth may slow to 1.4 percent next year from 1.5 percent in 2010, according to a Bloomberg poll of economists.

Europe Concerns

Concerns about Europe’s solvency are intensifying, pushing up market measures for risk to “at or near danger levels” for peripheral European nations, Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., wrote in an opinion piece on the company’s website. Pimco runs the world’s biggest bond fund and the report was originally published on the Financial Times website.

The Australian dollar will peak in October and “by that time Europe is going to be rotting,” said Taylor at FX concepts. “Australia will do very poorly between the second half of October and January-February.”

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Australia s dollar, this quarter s best performing major currency, is now the most overvalued.Purchasing power parity, a measure of the cost of goods relative to other countries, shows the so-called Aussie is 27 percent too expensive, according to data compiled by...
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