Australian Dollar Tipped To Fall

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– Australian dollar expected to fall against greenback
– ANZ Bank sees 1.03 as medium-term peak against US dollar
– Credit Suisse identifies those stocks that benefit from a weaker AUD

By Chris Shaw

The Australian dollar is generally regarded as something of a safe haven currency, this given the country's low public debt-to-GDP, the attraction of the dollar as a hedge against sovereign debt risks and the currency being backed by commodities.

One problem with this, in the view of Credit Suisse, is safe haven trades are now very crowded. As an example, the broker points out gold prices are close to the highs seen in the 1980s (in real terms). This is difficult to justify in Credit Suisse's view, as justification for the current gold price requires lots of inflation, when the current risk is for deflation in Europe given the region's debt issues.

Credit Suisse also cautions the Australian dollar is somewhat vulnerable to a global economic slowdown given the support offered the currency by commodity prices. Demand for base metals, oil and bulk commodities remains vulnerable to a cyclical downturn, which would likely put pressure on the currency.

Assuming a global slowdown scenario, Credit Suisse estimates the AUD/USD could be as much as 20% overpriced. The broker's fair value model suggests the currency pair is already around 8% expensive relative to current market fundamentals.

Leading indicators monitored by Credit Suisse suggest world growth could turn slightly negative in coming quarters, which would support falls in commodity prices of as much as 20-30%. The Reserve Bank of Australia (RBA) is also likely to cut interest rates further than yesterday's 0.25% cut, which Credit Suisse suggests could deliver 20% downside to the Aussie dollar.

ANZ Banking Group is similarly bearish on the Australian dollar outlook, expecting 1.03 against the US dollar is likely to be something of a peak for the medium-term. This reflects both the RBA rate cut this week and the view global economic conditions continue to deteriorate.

While the cost reductions in central bank swap lines announced last week, some evidence of concrete fiscal reform from both France and Germany and cuts to reserve requirement ratios in China have lowered the risk of a near-term global event, this risk is not being priced into the Aussie dollar at present in ANZ's view.

Even if a near-term event is avoided the outlook for the global economy is still soft, as European growth is likely to be around zero in the first quarter of 2012 on ANZ's numbers. The bank also suggests China needs deliver another cut to reserve requirements to keep Asian growth expectations intact.

A black swan for ANZ is the risk US growth disappoints, as any weakening in the recent trend of improving US data will rekindle fears of an untidy global slowdown, so accelerating strains on the global financial system.

This leads ANZ to suggest the Australian dollar is likely to underperform the greenback and most other crosses in the period ahead. Given the large shift in risk reversals over the past week, buying Aussie dollar downside appears a cheap way to position for current cycle risks in the bank's view.

When the AUD/USD rate weakens, Credit Suisse notes USD exposured stocks and defensives tend to outperform. Those in the former category include CSL ((CSL)), Cochlear ((COH)), News Corporation ((NWS)), Billabong ((BBG)), James Hardie ((JHX)), Brambles ((BXB)), Aristocrat ((ALL)) and Amcor ((AMC)). These companies benefit from a currency translation perspective.

Among the defensive plays Credit Suisse suggests could benefit from a weaker AUD/USD rate are Telstra ((TLS)), AGL Energy ((AGK)), Woolworths ((WOW)). Foster's ((FGL)), Metcash ((MTS)), Coca-Cola Amatil ((CCL)) and Goodman Fielder ((GFF)).

 

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