Strategists are boosting forecasts for Australia’s dollar by the most of any Group of 10 currency, betting that $190 billion of natural-gas projects will keep funds flowing into the nation as spending on mines slows.
Estimates for the Aussie by Dec. 31 have climbed 8.2 percent to $1.05, from 97 U.S. cents on June 30, according to the median of 48 strategist estimates compiled by Bloomberg. Options data show there’s a 51 percent chance the currency will exceed the forecast as traders increase bets on its advance to the highest in five weeks.
The Aussie’s 49 percent gain since the end of 2008 is the biggest among more than 150 currencies tracked by Bloomberg. The looming peak in resource investment highlighted by the Reserve Bank in November is being blunted by spending on liquefied- natural-gas projects, government debt, stocks and real estate. That’s supporting the currency, even as the worst back-to-back years of job growth since 1997 and the weakest consumer demand since July spurs prospects interest rates will fall to a record.
“It’s very hard to construct a case that the Australian dollar should fall materially, given the amount of capital inflow into the country,” Andrew Salter, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney, said by phone on Jan. 29. “It just shows the search for yield that’s going on around the world at the moment is a pretty broad phenomenon and hits all asset classes.”
The Aussie bought $1.0426 yesterday in New York, trading 24 percent higher than its 10-year average of 84.21 U.S. cents. The last time it was below $1 was in June, when it reached the 2012 trough of 95.82 cents.
Foreign investment totaled A$30 billion ($31.3 billion) in the three quarters ended Sept. 30, from A$27 billion a year earlier, data from Australia’s statistics bureau show. It reached a full-year record of A$50 billion in 2011.
The Foreign Investment Review Board approved A$170.7 billion of proposed investments in the 12 months to June 30, according to its annual report. That included A$11.2 billion in oil and gas exploration and development, more than twice the A$4.6 billion seen in 2010-2011. Planned spending on real estate totaled A$59.1 billion, a 42 percent increase, the data show.
Companies from Chevron Corp. to Inpex Corp. to ConocoPhillips are building seven LNG ventures in Australia at a cost of about $190 billion. LNG is gas cooled to minus 160 degrees Celsius (minus 256 degrees Fahrenheit) so it occupies 600 times less space.
The projects suggest LNG will surpass iron ore as Australia’s largest export earner by 2016 and the nation may overtake Qatar as the world’s biggest LNG shipper the following year, Geoff Kendrick, Nomura Holdings Inc.’s London-based head of European currency strategy, wrote in a Jan. 24 report.
The value of mineral and energy projects rose to a record A$268 billion as of Oct. 31, the Bureau of Resources and Energy Economics said in a Nov. 28 report. LNG, gas and petroleum projects accounted for 73 percent of the expenditure and iron ore 9.8 percent, it said.
Signs of weakness in the economy, including December’s unexpected decline in payrolls, will spur a drop in the Australian dollar, Hamish Pepper, a Singapore-based currency strategist at Barclays Plc, said in a Jan. 30 interview.
“The central bank’s easing bias remains appropriate,” Pepper said. “The currency will likely depreciate beyond the first quarter,” to 98 cents by Dec. 31, he said.
Reports last month showed Australia’s unemployment rate rose to 5.4 percent in December and consumer spending unexpectedly declined the previous month. Payrolls have risen by 198,100 over the past two years, the weakest since 1996-1997, government data compiled by Bloomberg show.
Interest-rate swaps show traders see an 83 percent chance the RBA will cut its key rate to a record 2.75 percent or lower by June.
Reserve Bank of Australia Governor Glenn Stevens has lowered the benchmark rate six times over 14 months to 3 percent, without dulling the appeal of Australian government debt because yields remain the highest among nations with AAA ratings from the three major credit assessors.
The rate for Australia’s benchmark 10-year bond was at 3.49 percent, more than 90 basis points higher than its equivalent in Norway, which has the second-highest yields within the group. Similar maturity Treasuries, rated AA+ by Standard & Poor’s, yielded 1.98 percent.
Stevens said in November the peak in resources investment will likely occur in 2013 or 2014. He also said that once companies are able to extract and export higher quantities of resources, the next phase of the mining boom will take hold.
“This phase has begun for iron ore but it is mostly still ahead of us, especially for gas,” he said.
The potential impact of LNG exports prompted Nomura’s Kendrick to boost his forecast for the Aussie to $1.12 from $1 by Sept. 30, its strongest level since being freely floated in 1983. ANZ’s forecast is for the currency to trade at $1.05 through 2013.
The Aussie will trade near the middle of its 2013 “range somewhere in the high 90s to a bit over $1.10,” said Stephen Miller, a Sydney-based managing director at BlackRock Inc., which oversees $3.8 trillion of assets as the world’s biggest money manager.
“I don’t see significant downside for the exchange rate because we have a view of interest rates falling,” Miller, who predicts 50 basis points to 75 basis points in cuts this year, said in a Jan. 15 interview.
The increases in Australian dollar forecasts have surpassed those for other commodity-driven currencies. Year-end projections for New Zealand’s dollar, influenced by dairy exports, climbed 5.1 percent from mid-2012 to 83 U.S. cents. Canada’s currency, supported by the appeal of the nation’s oil reserves, will be at 97 Canadian cents versus the greenback by Dec. 31, compared with a previous estimate of 99 cents.
The premium traders are willing to pay for options which give the right to sell the Aussie over those that allow for purchases shrank to a three-year low of 1.4 percentage points on Jan. 11, according to three-month 25-delta risk reversal rates.
Hedge funds and other large speculators were holding the largest bet on a stronger Aussie in five weeks as of Jan. 22, U.S. Commodity Futures Trading Commission data show.
Investor bullishness on the currency is underpinned by a rebound in China, Australia’s largest trading partner. Growth in the world’s second-biggest economy accelerated last quarter for the first time in two years, government data showed last month.
Iron ore rallied 76 percent since reaching a three-year low on Sept. 5, after China approved projects for the construction of about 2,000 kilometers (1,250 miles) of roads, subways in 18 cities and extra spending on railways. The nation is the world’s biggest consumer of iron ore and the largest steel producer.
Australian equities posted their longest stretch of daily gains in more than nine years, rising for 10 days through Jan. 30, buoyed by Melbourne-based BHP Billiton Ltd., the world’s biggest mining company. Investors are being drawn to the S&P/ASX 200’s forecast dividend yield of 4.8, the highest among the world’s 10 largest equity markets, according to data compiled by Bloomberg. The S&P/ASX 200 Index fell 0.4 percent yesterday.
“We’re seeing more demand for relatively high-yielding currencies,” Mitul Kotecha, Hong Kong-based head of currency strategy at Credit Agricole SA., said in a Jan. 30 interview. “In an environment of improving risk appetite, that’s only going to continue.”
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