The Australian dollar is being abandoned by international investors spooked by the deteriorating outlook for global growth, following the uptick in the euro-zone’s sovereign debt troubles, analysts say.
The dollar fell more than 6 per cent against the US dollar last week, as fears grew that the sovereign debt crisis in Europe might spoil a recovery in the global economy. The dollar dropped again this morning, sliding nearly 1 US cent to 82.23 US cents.
In addition to the hefty falls against the US dollar – a traditional safe haven in the time of rising global volatility – the Aussie dropped nearly 7 per cent against the beleaguered euro over last week.
“Australia has been unofficially put on a downward ratings review, which has caused a lot of people to pull back,” said Herston Economics chief economist Clifford Bennett.
Previously traders had been attracted by the Australian dollar’s relatively high interest rates and the robust outlook for the local economy. The Aussie, one of the best performing currencies of 2009, is known as a risk proxy, or an asset investors plough funds into as a way of betting on a growing global economy.
Mr Bennett said the fact that the Aussie had fallen more against the euro dispelled the notion it was only a reaction to European debt.
“Clearly the Australian dollar had an even bigger story about it and that’s why it was sold down more.”
The large positions held by institutional investors reflected a shift to Asia as a centre of the world’s economic growth, Mr Bennett said.
Pimco Australia head John Wilson acknowledged an unofficial “re-rating” is underway but said nothing fundamental had changed about Australia’s outlook.
“It is likely that this is a temporary uptick and largely due to contagion from sovereign risk fears in Europe,” he said.
The dollar’s woes come the same month the Reserve Bank raised rates to 4.5 per cent from 4.25 per cent, the sixth rise since October.
Since then, the one-year outlook for interest rates fell to neutral for the first time since June 2008 last week, showing investors foresee only a slim chance of higher rates within 12 months.
The market is now tipping a 13 per cent chance of a rate cut in June, according to Credit Suisse data. Central banks typically cut interest rates to stimulate a sluggish economy.
Mining tax
Adding to the concerns for the Aussie and the local economy was the mining industry’s public relations offensive against the federal government over the planned resources super profits tax, analysts said.
“It is hard to measure how much of the plunge can be attributed to the 40 per cent mining profits tax,” said Mr Wilson.
However, the Australian dollar is sensitive to developments at the major miners.
Rio Tinto yesterday said it was reviewing all of its capital spending in Australia in light of the planned tax. The news sent the dollar below 82 US cents before recovering.
Pimco’s Mr Wilson said Australia should still benefit from Chinese appetite for Australian commodities, “but the stronger recovery is dependant on Asian demand”.
Analysts are split over the direction of the Aussie dollar.
HiFX senior consultant Thomas Averill said the dollar could fall lower to 80 US cents this month, while Herston Economics’ Mr Bennett said the Aussie dollar had already bottomed and he expected it to climb.
GFT currency advisor Boris Schlossberg said markets remained concerned about weakness in commodity prices, fears of declining demand from China and the chance the RBA rate tightening cycle may have reached its peak.
“But as markets calm down, the Aussie could find some support at these levels.”
czappone@fairfax.com.au
BusinessDay
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