aussie dollar to fall

Australian Dollar May Fall to 77 U.S. Cents, Says BNP (Update1)

By Anchalee Worrachate

Feb. 5 (Bloomberg) -- Investors should sell the Australian dollar on growing signs the fallout from the U.S. subprime- mortgage crisis is spilling into the nation's financial markets, according to BNP Paribas SA, France's biggest bank.

The currency, known as the Aussie, will decline to 77 U.S. cents by year-end and 65 cents by the end of 2009, according to Hans-Guenter Redeker, global head of currency strategy at BNP. The currency was at 90.43 U.S. cents by 10:46 a.m. in London, from 90.82 cents yesterday.

The Aussie has strengthened 17 percent against the U.S. dollar in the past 12 months, making it the third-best performer of the 16 most-traded currencies tracked by Bloomberg. Investors have been lured by rising commodity prices and an economy that has grown for 17 straight years. Australian manufacturing shrank for the first time in almost two years in January, while consumer and business confidence weakened, signs the economy may be cooling as the slowdown in the U.S. spreads around the world.

``The market's love affair with the Aussie dollar will soon be over,'' Redeker, who correctly predicted the yen would rise by the end of last year, said in an interview yesterday. ``There's no way Australia will escape the impact of the global financial turmoil. We are bearish on the currency.''

The Aussie rose versus the euro and the yen today after the Reserve Bank of Australia raised interest rates by 25 basis points to 7 percent, further boosting the currency's yield advantage over low-yielding assets. It traded at 1.6225 per euro from 1.6329 yesterday.

Moody's Review

The Aussie also advanced yesterday even after Moody's Investors Service said it may cut the ratings on A$83 billion ($75 billion) of Australian mortgage-backed bonds linked to PMI Group Inc. on concern the U.S. home-loan insurer will find it harder to pay claims.

Moody's is reviewing the ratings on bonds tied to loans insured by the local unit of PMI. They account for about 45 percent of the A$180 billion mortgage-backed bonds issued in Australia, making it the biggest review Moody's has done in the nation, Henry Charpentier, structured finance analyst at the ratings company in Sydney, said yesterday.

Any downgrades will stifle sales of Australian mortgage- backed bonds, which fell 87 percent in the six months to Dec. 31. Australian lenders will find it more costly to raise capital to fund mortgages if Moody's cuts the ratings.

`This Environment'

Redeker estimated that as of June last year, about one-third of the nation's current-account deficit was funded by sales of asset-backed securities denominated in local currency into the global market.

``The question is whether the world still has appetite for those sort of assets in this environment,'' he said. ``Some Australian banks rely heavily on the securitization market. With what happened with Moody's, we suggest caution with the Aussie.''

Securities loans accounted for nearly 50 percent of the total outstanding housing loans in 2007, compared with 34 percent in 2003, Redeker said, citing figures from the Australian Prudential Regulation Authority,.

``That signals the heavy reliance of these banks on capital markets for funding purposes.''