Dollars Down Under Could Hit Ceiling by Year End, Bears Say
By MARY KISSEL March 21, 2005
HONG KONG -- Currencies down under have hit new highs, but bears warn that the good times may not last much longer.
To some investors' delight, the Australian dollar neared its seven-year high against the U.S. dollar, and the New Zealand dollar, also known as the kiwi, hit a 23-year high last week. Economists cite strong, export-led domestic economic growth, attractive domestic interest rates and burgeoning demand from new players in the market as drivers of the rally.
But "this is as good as it gets," says David Mozina, ABN Amro's head of foreign-exchange and fixed-income strategy in Sydney. "I think both currencies will be lower by year end. ... These markets are heavy with speculators."
As of Friday in late global trading, the Australian dollar was trading at 79.48 cents against the greenback, up 6.19% from a year ago, while the kiwi was trading at 74.45 cents, up 13.56% -- though traders note that prices can fluctuate widely from day to day. Price movements in the kiwi generally track those of the Australian dollar.
Despite the heady performance, investors have continued to buy. According to data from the Chicago Mercantile Exchange, net purchases of the Australian dollar against the U.S. dollar have trended steadily upward since mid-2001 and are nearing their highest point since 1995, a level that "looks excessive," says Sabrina Jacobs, a foreign-exchange strategist at Dresdner Kleinwort Wasserstein in Singapore.
"You often see a correction" at this point, says Ms. Jacobs, who forecasts that the Australian dollar will be at 81 U.S. cents in six months, and the kiwi at 73 cents. In the short term, she recommends the Philippine peso, partly because the central bank supports a stronger currency and the peso isn't widely held. Ms. Jacobs thinks the U.S. dollar could drop to 52 pesos in coming weeks, from about 54 pesos now.
The currencies Down Under are popular largely because of rising base-metals prices. The Australian and New Zealand dollars, like the Canadian dollar, are known as "commodity currencies," as their respective economies are heavily dependent on exports. Over the past two years, base-metal export prices have risen about 40% as demand from China has boomed. The trend looks set to continue for a while yet, as Australian exporters busily build infrastructure to keep up with demand.
The higher prices have spurred a rush of deal making as well, including BHP Billiton PLC's 9.2 billion Australian dollar (US$7.3 billion) offer for WMC Resources Ltd., which topped a hostile offer from rival Xstrata PLC -- and may still have to stave off a bid from Rio Tinto PLC.
Buying the Australian dollar is "a proxy for the foreign-exchange markets whenever they want to take a punt on resources," explains Richard Martin, an economist at IMA Asia. But Mr. Martin isn't bullish on the longer-term trend, adding that since the Australian dollar's flotation in 1983, "it's gone down."
In the short term, a falling U.S. dollar and generous domestic interest rates have also helped boost demand for the two currencies. Since central bankers globally started ratcheting down interest rates in 2001, investors have been hunting for higher returns -- and they have found them in Australia and New Zealand, whose interest-rate cycles don't mirror those of other major economies. Today, New Zealand's 6.75% benchmark rate ranks as one of the highest among developed economies, and at 5.5%, Australia's ranking isn't far behind. That compares with 2.5% in the U.S. and 2% for the 12 countries that use the euro.
Traders say those big gaps have led many investors to borrow money at the cheaper U.S. and euro rates and buy Australian and New Zealand dollars. But that "carry trade" won't last forever, as interest rates in other major economies, such as the U.S., rise, warns Stephen Walters, an economist at J.P. Morgan in Sydney. Mr. Walters predicts that the U.S. Federal
Reserve will raise rates six times within the next year, while the Reserve Bank of Australia will raise rates once this year but reverse that increase next year as growth slows.
He is even more bearish on the New Zealand economy, which "tightened too assertively" and will start to feel the effects this year on economic growth, he predicts. "When that currency turns around, we think the downside will be more severe," he says.
"The point of inflection is around when the interest-rate differential" reaches two percentage points, says Geoff Bowmer, director of foreign exchange for Macquarie Securities in Sydney. "If our interest rates get to be 1.5% above U.S. interest rates, it's normally not enough to forgive the Aussie its transgressions. Once it's above [two percentage points], the local economy can do all sorts of nasty things and people will shrug it off."
Asian central banks, too, may be contributing to the Australian and New Zealand dollars' recent buoyancy, although these banks don't release public data on the composition of their portfolios. In February, the Bank of Korea referred to the Australian dollar as one of the "high-yielding" currencies into which it would diversify its purchases. A number of traders report that they have noticed an upswing in Asian central-bank purchases of Australian dollars.
