Last Aussie bull capitulates

Commonwealth Bank of Australia is losing faith in the ability of the local dollar to extend its world-beating gains this year.

Since April, CBA was alone among Australia’s big-four banks in predicting the Aussie (CME:A6U14) would add to a rally that saw it jump 4.6% against the U.S. dollar in 2014, the most of 31 major currencies tracked by Bloomberg. Then, on Aug. 14, the nation’s biggest lender cut its year-end forecast to 94 U.S. cents, compared with 93.35 today and down from an earlier estimate of 97.

The change in sentiment shows how Australia’s economy is struggling amid decade-high joblessness, with CBA now saying policy makers may delay raising interest rates until 2015. The Reserve Bank of Australia has kept borrowing costs unchanged at a record-low this year as it seeks the right course amid the quickest inflation in 2 1/2 years and anemic growth.

“The rise in the unemployment rate” probably means “the RBA stays on hold a lot longer,” Richard Grace, CBA’s Sydney-based chief currency and interest-rate strategist, said in a phone interview on Aug. 15. “We still see Aussie dollar upside, just not as much as before.”

Rate Bets

The cut in the bank’s Aussie forecast brings it more in line with its three main peers, which yesterday reiterated their year-end estimates of 85 cents to 90 cents. The median prediction in a Bloomberg survey of more than 50 strategists puts it at 91 cents.

CBA sees policy makers raising their benchmark rate of 2.5% in February, after previously expecting a November increase. Swaps traders are even more pessimistic, with data compiled by Bloomberg indicating a better than 30% chance of a rate reduction by then.

Even without an increase, Australia has the highest main rate in the developed world after New Zealand’s 3.5%, making its currency attractive to international investors.

The Aussie has gained 6.3% this year versus a gauge of its major developed-nation peers, making it the best performer among the 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. It climbed to an eight-month high of 95.05 cents on July 1.

Gains Vulnerable

This year’s gains are looking vulnerable after the RBA cut its projections for the economy on Aug. 8. It now predicts gross domestic product growth of 2% to 3% in the year through June 2015, down from a forecast of 2.25% to 3.25% three months earlier. Inflation quickened to 3% in the second quarter, compared with a target of 2% to 3%.

Australia’s jobless rate jumped to a 12-year high of 6.4% in July, compared with a U.S. rate of 6.2%. A surge in resources investment that buoyed the economy through the global financial crisis is waning, just as projects funded by the boom come on stream, helping to depress prices and weigh on Australia’s trade balance.

“Next year is when we think there’ll be a more significant depreciation for the currency,” John Hopkinson, head of quantitative currency research at Bank of America Corp. in New York, said by phone on Aug. 15. “If there isn’t the demand for the minerals that they’re trying to export, then we’re going to see the terms of trade go very much against them.”

Bank of America sees the Aussie weakening to 88 U.S. cents by year-end, and even lower in 2015 as a resources glut takes hold, according to Hopkinson.

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