Australian dollar's rally at vanguard of global recovery
May 27, 2009
By Candice Zachariahs and Ye Xie
Analysts can't keep up with the strongest three-month rally for Australia's dollar. They are raising forecasts faster than any other major currency on optimism for a global economic recovery.
Driven by demand for the highest interest rates in the developed world, the Aussie is defying the country's first recession in 18 years. It traded at 78.02 US cents on Monday, up 21 percent since February 25, the quickest gain since it started trading freely in 1983, according to Bloomberg data.
The median year-end Aussie forecast in monthly Bloomberg surveys has risen 14 percent against the US dollar this year, the biggest increase among the 16 most-traded currencies.
Strategists at 23 major financial houses raised median estimates this month on speculation China's demand for Australian exports would rebound.
Mellon Capital Management reversed bearish Aussie bets in February, deciding it would outpace all currencies.
"The bears are throwing in the towel, and the Aussie is undervalued," said Paresh Upadhyaya, a senior vice-president at Putnam Investments in Boston.
Policy makers "still have the rate differentials to support the currency," Upadhyaya added. "Asia is still going to expand, and China and India will have growth above 5 percent. That's fuelling demand for commodities, so Australia's exports are holding up much better than" the rest of the Group of 10 (G10) most developed nations.
Bets favouring the Aussie are votes of confidence that global economies are on the mend.
Australia was at the "vanguard of a global recovery", said Glenn Maguire, a Société Générale economist in Hong Kong, after reports showed retail sales jumped by the most in three months in March, exports to China soared 70 percent this year and the jobless rate unexpectedly dropped last month.
Woolworths, the country's biggest retailer, said last month that first-quarter sales rose faster than analysts estimated.
Some Aussie pessimists are betting on a global recovery. Deutsche Bank, the biggest currency trader, recommends borrowing Australian dollars to buy the real to benefit from Brazil's higher interest rates.
Both economies rely on commodity exports that benefit from worldwide growth.
Other analysts say the currency's rally probably doesn't have much staying power. "The Australian dollar is fully valued given the subdued recovery story we see going on," said Anthony Michael at Aberdeen Asset Management in Singapore.
Australia's legal tender also may weaken as investors turn to assets in emerging markets, like Brazil and South Africa, where benchmark interest rates are 7.25 and 5.5 percentage points higher, respectively.
Median estimates see Australia's economy contracting 0.4 percent this year, the least among the G10 nations, then expanding 2.5 percent in 2010. The US economy will contract 2.8 percent this year.
The Aussie slid 39 percent versus the US dollar and 47 percent against the yen between July and October last year, as the Reserve Bank of Australia moved to reduce interest rates for the first time in seven years. - Bloomberg
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