Best Australian dollar forecaster predicts 6% decline

BloombergSydney

The best forecaster of the Australian dollar isn’t swayed by the recent surge in the currency, predicting it will fall back below 70 US cents by year-end.For Konrad Bialas, a foreign-exchange strategist in Warsaw at TMS Brokers, the bulk of the Aussie’s depreciation is behind it after the currency dropped 20% in the 12 months through September and touched a six-year low of 68.96 cents on September 7. Don’t expect a rally though, according to Bialas, who estimates it will end this year at 69 cents, 6% lower than its close in New York on Friday. The currency will recover to 71 cents in the final quarter of 2016, he predicts.Bialas is part of a team that was the best forecaster of the Aussie in the year through September, according to Bloomberg rankings. He predicts China, Australia’s largest trading partner, will probably lower the growth target in its new five- year plan to 6.5% from 7% this year, while a Federal Reserve interest-rate increase in December will also keep pressure on the Aussie dollar.“The probability is still significant” that the Australian dollar will retest its 2015 low before the end of the year, Bialas wrote in response to e-mailed questions. “I can agree that China fears from August-September were exaggerated,” but “the outlook isn’t that rosy to buy any risky assets without hesitation,” he said.Australia’s dollar was at 73.36 cents at the close of trade in New York on Friday. It climbed 4.1% for the week, the biggest advance since December 2011. The median of forecasts compiled by Bloomberg is for the currency to end the year at 69 cents, with the range of estimates extending from 66 to 75 cents.While markets have been dialing back their expectations for a US interest-rate increase this year, Bialas reckons that the resulting rally in riskier assets such as equities, oil and commodity currencies will actually assuage Fed concerns about tightening.The markets “are raising chances for December lift-off” and when that begins to be reflected in statements from the Fed and its policy makers “it will be devastating for current sentiment,” he wrote.The Australian economy has struggled in recent years to throw off its dependence on mining investment and raw-material exports as signs of weakening Chinese demand have undermined both. The International Monetary Fund predicted last month that a weak resource price outlook could cut almost 1 percentage point annually from the growth rate of commodity exporters between 2015 and 2017. To counter those forces, the Reserve Bank of Australia began lowering rates toward the end of 2011 to support domestic demand, taking its benchmark to a record-low 2% from 4.75% at the start of the cycle. With the US Federal Reserve moving to tighten policy, the Australian dollar has dropped from above parity with the greenback in 2013, boosting the prospects for local exporters and allowing Governor Glenn Stevens to say last month he was “pretty content” with the level of interest rates. Bialas reckons that pressure on the currency from Fed tightening would be enough for the RBA to stay on hold until at least the fourth quarter of 2016, when TMS forecasts they’ll lift the Australian benchmark by a quarter percentage point. “With expectations building on changing the stance of the RBA, the Australian dollar will be getting a boost before that time,” he said.The Aussie will trough at 68 cents in the second quarter next year, after which prospects for RBA hikes along with a better commodity outlook will drive the currency to 70 and then 71 cents in September and December 2016, TMS forecasts.Bialas said that in forecasting the currency, TMS considers not only what’s changing with various fundamental parts of the picture, but also when the markets will start pricing in such shifts.“Right now we’re most focused on China’s growth and commodity prices prospects,” Bialas wrote. “As the bulk of adjustments to structurally lower Chinese demand growth for industrial commodities will take place at the turn of the year,” expectations should build in the second half of 2016 “for higher demand in 2017 that will lift commodity prices.”