The Australian dollar is seen extending its aggressive sell-off since mid-July to reach 80 U.S. cents over the next 12 months, on expectations the central bank will cut interest rates repeatedly to support flagging growth.

Concerns about a global slowdown and its adverse impact on Australia’s commodity exports are also likely to undermine the currency, which plumbed one-year lows of $0.8233 against the U.S. dollar earlier this week.

The latest slide came after the Reserve Bank of Australia (RBA) lowered its key cash rate by 25 basis points to 7 percent, the first cut in seven years.

Investors are factoring in three to four quarter-percentage point rate cuts in the next 12 months as the RBA tries to support domestic demand, hit by the global credit crunch, record petrol prices and soaring mortgage costs.

Australia’s growth is slowing at a time when some investors think the worst for the United States economy is over and rates there are likely to go up. If right, rate differentials between Australian and U.S. assets should narrow.

“We suspect more selling could be on the cards in the Aussie as further monetary easing looms and the U.S. rate cycle turns upwards next year,” said Kenneth Broux, an analyst at Lloyds TSB.

A Reuters monthly poll of 48 strategists produced a median forecast of 85 U.S. cents in a month’s time and 82 cents in six months, before falling further to 80 U.S. cents in 12 months time.

The Aussie hit a 25-year high of $0.9851 in mid-July, but has lost over 16 percent since then after the RBA signalled rate cuts, and as global growth concerns hammered commodity prices and currencies linked to them.

“A retracement to $0.80 cannot be ruled out in the near term especially if oil prices continue to falter and gold prices drift south of $800,” said Broux.

“The August 2007 low of $0.7675 is a realistic target if $0.8000 gives way and market speculation intensifies of more aggressive RBA cuts by year end.”

OVERSOLD?

Still, some suspect the sell-off in the Aussie is overdone.

They argue the Australia is in much better shape than some of it counterparts in the developed world, with earnings from commodity exports, especially to Asia, likely to shore up the economy.

“While we have been unrelentingly bearish on the Aussie for some time now, we do recognise an overshoot when we see one and the recent Aussie free-fall looks overdone,” said Stephen Koukoulas, global strategist at TD Securities.

In particular, he thought investors were paying too much attention to the Reuters-Jefferies CRB index < .CRB> of major commodity futures, which has fallen nearly 21 percent from its highs in July.

In contrast, the RBA’s index for commodity prices, a measure more specific to Australian exports, rose 1.0 percent to a record in August, driven by price increases in coking coal, thermal coal and wheat.

The RBA’s commodity index is up around 30 percent so far this year thanks to massive price increases for coal and iron ore, Australia’s two biggest export earners.

Yet the Australian dollar is down 4 percent on the year in trade weighted terms < =AUD>, and 12 percent below the peak it reached in July.

“Since the Aussie was floated in 1983, there had been a pretty solid correlation between the Aussie and the RBA commodity price index,” noted Koukoulas.

Source: http://www.afxnews.com

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