Uneasy ride into commodity twilight for the Aussie
The drop in commodities prices is reverberating through the foreign-exchange market from Australia to Colombia, with analysts predicting an end to the boom that doubled raw materials prices since 2004.
Royal Bank of Scotland analysts say traders should sell the Aussie - along with Colombia's peso - because they're most vulnerable to a slump in commodities that would widen their current account deficits.
New York-based Citigroup has turned bearish on the Aussie, whose 5.3 per cent drop in the past month is the steepest among the most widely traded currencies, on speculation the commodity "super-cycle" is ending.
"They built up their commodities sector tremendously, the currency went way up, and the rest of the economy is ferociously uncompetitive," John Taylor, chief executive of New York-based currency hedge fund FX Concepts, said of the Australian dollar.
He recommended selling the Aussie because it's "in a bubble".
Standard & Poor's GSCI gauge of 24 commodities is down 8 per cent from its high for the year on February 1, damping the appeal of currencies whose economies fluctuate with the outlook for natural resources.
At the same time, a slowdown in infrastructure investment in China signalled the end to the "decade of commodity demand", Stanley Druckenmiller, the billionaire hedge fund manager, said at the Sohn Investment Conference in New York last week.
A decline in commodities, which have surged 45 per cent since the end of 2005, puts the Aussie's 36 per cent gain in the same period at risk because raw materials account for more than 70 per cent of Australia's exports.
The currency, which did not rise above US85¢ between 1990 and 2006, has not dropped below that level in almost three years. It was trading at US99.79¢ at 5pm on Tuesday, down from last month's high of US105.82¢.
Australia's current account deficit, the broadest measure of trade because it includes investments, would widen to 7 per cent of the economy from 3.65 per cent in 2012, should commodity prices drop to 2006 levels, according to RBS.
In Colombia, where the top exports are oil and coal, the deficit in the measure of trade based on goods, services and transfers would also double, it said.
"Vulnerabilities have been masked by rising commodity prices," said David Petitcolin, a global currency strategist at RBS in London. "The Aussie and the Colombian peso will suffer the largest deterioration in their current account deficits as commodity prices fall back to pre- euphoria levels, and that suggests they are overvalued."
RBS strategists forecast the Aussie will fall to US98¢ by December, while the median estimate of more than 45 economists in a Bloomberg survey calls for the currency to end the year at US101¢. In January, the estimate was for US105¢.
"We've gone from being big fans of the Aussie dollar to worrying," said Steve Englander, head of Group of 10 currency strategy at Citigroup.
Citigroup predicts the price of iron ore, Australia's top export, will collapse, pushing the currency towards US95¢.
But Rabobank International predicted central bank stimulus to boost global growth would help support the Australian dollar.
Interest rates from zero to 0.5 per cent in the US, UK, eurozone and Japan might encourage flows into the nation's higher-yielding, AAA-rated bonds.
"There's a huge amount of liquidity from central banks and investors are still looking for yield," said Jane Foley, senior currency strategist at Rabobank in London.
"Australia on a relative basis still looks OK, even though fundamentals have worsened, so I don't think we are going to see an aggressive selloff." The currency would rise to US104¢ in six months, she said.