Overvalued Aussie dollar heading for fall

The Australian dollar was last night at US94.63c, but a survey of economists tips a fall to US88c by year-end. Photo / Getty Images

Australia's dollar, this quarter's best performing major currency, is now the most overvalued.

Purchasing power parity, a measure of the cost of goods relative to other countries, shows the Aussie is 27 per cent too expensive, according to data compiled by Bloomberg.

The median estimate of strategists and economists is for it to weaken 6 per cent by year-end, the fourth-worst performance of 31 currencies tracked by Bloomberg.

While Australia's dollar has soared 11.4 per cent since June, benefiting from its ties to China's economy, traders speculate new Prime Minister Julia Gillard's planned tax on mining companies will damp demand for the nation's assets at the same time global economic growth decelerates. The nation's mining industry has enjoyed a record investment boom to feed Chinese demand for iron and coal.

"If I were to pick a currency to have my money in for the next month, it would be Australia's, but after a month I'd pick something else, like the US," said John Taylor, chairman of FX Concepts in New York.

Momentum in the Australian dollar may lead it to test its record high of US98.50c next month before depreciating to the low 80c level by early next year. Taylor said. That's when a slowdown in global growth will prompt investors to seek safety in the US dollar, he said.

The currency was trading at US94.63c last night after five straight weeks of gains, the longest winning streak since September 25 last year.

"At these levels, there's a lot of good news in the price for the Aussie," said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi, in London. "There's greater risk of disappointment."

The median estimate of strategists and economists surveyed by Bloomberg is for the currency to weaken to US88c by year-end.

The forecast is the same as in early July, even though the Aussie has risen from about US84c. The only survey respondent to forecast a rise is UniCredit, which sees a rate of US94c, little changed from last week.

Of the 31 major currencies tracked by Bloomberg, only three are forecast to do worse than Australia's dollar: the Czech Koruna, Danish Krone and Swedish Krona.

Investors are awaiting final details of a planned tax which the Government estimates will result in BHP Billiton, the world's largest mining company, Rio Tinto, the third biggest, and the rest of the nation's coal and iron ore companies paying an extra A$10.5 billion ($13.6 billion) in tax in the first two years.

Australian Treasurer Wayne Swan signalled on September 8 that final terms of the Government's planned mining tax may depend on talks with independent lawmakers. Greens leader Bob Brown said his party wants to increase the proposed levy and expand it to include uranium.

While the Aussie "has a lot of good things going for it," the tax "is something that every investor has been watching," said Neil Jones, head of European hedge fund sales at Mizuho Corporate Ban in London. "Anything that hampers the jewel in the crown is going to catch a lot of attention."

Australia's dollar has become a favourite for traders because of the nation's relatively high interest rates. The nation's central bank has raised its benchmark borrowing rate to 4.5 per cent from 3 per cent over the past 12 months, as the Federal Reserve and European Central Bank (ECB) kept theirs unchanged.

Twenty per cent of Australia's economy depends on exports led by iron ore and coal to countries including China. Links with fast-growing economies helped it skirt a global recession and expand 1.2 per cent last quarter, the fastest pace in three years, driving the jobless rate down to almost half the level of the US.

Australia's currency may maintain its gains as long as the Fed and the ECB keep their benchmark rates at record lows to nurse recovery, according to Christoph Kind, head of asset allocation at Germany's Frankfurt-Trust. He has an "overweight" position on the currency, meaning he is expecting it to outperform.

"The past performance of the Aussie dollar has been breathtaking and every attempt to go short on the currency always failed," said Kind. "I don't see an immediate turnaround as long as US growth remains weak."

The International Monetary Fund's John Lipsky, the agency's second highest-ranking official, said last week in a speech the global economic recovery "has slowed somewhat".

Australia's currency weakened 9.5 per cent amid the worldwide recession in 2008, its worst performance since 1997, according to Bloomberg Correlation-Weighted Currency indexes.

Growth in Europe may falter as nations including Greece, Spain and Portugal trim spending after a budget deficit crisis forced European officials to craft a €750 billion ($1.3 trillion) aid package in May.

The region's growth may slow to 1.4 per cent next year from 1.5 per cent this year, according to a Bloomberg poll.

The Australian dollar will peak in October and "by that time Europe is going to be rotting," said Taylor at FX concepts.

"Australia will do very poorly between the second half of October and January-February."

- BLOOMBERG