Best Forecaster Says Buy the Aussie Dollar

(Bloomberg) -- Australia's dollar is set to rally as easing U.S.-China trade tensions bolster risk assets, according to the currency's top forecaster. Funds including AMP Capital Investors Ltd. and QIC Ltd. are bearish.

The Aussie's recent declines are overdone and it will strengthen about 5 percent to 74 U.S. cents by year-end, said Juan G. Perez, senior foreign-exchange trader and strategist at Tempus Inc., part of the Monex Group that submitted the most accurate prediction for the currency in Bloomberg's first-quarter rankings.

“Developments in trade are what can turn the tide, and fast,” Washington-based Perez said this week. “There is room for growth and as Oceania activity picks up with renewed infrastructure projects, the Aussie could surprise.”

The Aussie sank to 69.88 cents last week, the lowest since early 2016 apart from a short-lived spike below that level during the flash-crash in January. The currency traded at 70.20 cents at 12:48 p.m. in Sydney on Thursday.

Tempus isn't the only one predicting Aussie gains. Bank of America Corp. last month forecast the currency will rise to 78 cents by year-end as the trade war fizzles out, while Goldman Sachs Group Inc. recommended going long to capitalize on improving Chinese growth.

U.S. trade negotiators arrived in Beijing this week, seeking progress in talks aimed at resolving the tariff war between the two nations. Treasury Secretary Steven Mnuchin called the meetings “productive.” CNBC cited sources saying a deal could be announced by next Friday.

Read more: Aussie yield at 1% in view as CPI miss spurs rate-cut bets

Not everyone is buying into the optimism.

The Aussie is set to fall below 70 cents as the Reserve Bank of Australia moves toward cutting interest rates to revive growth, according to AMP Capital.

“The Aussie dollar is likely to fall into the 60 cents range as the gap between the RBA's cash rate and the U.S. Federal Funds rate will likely push further into negative territory,” said Shane Oliver, head of investment strategy in Sydney. At the same time, “excessive Aussie short positions and high commodity prices will likely prevent a crash,” he said.

There's a close to 50 percent chance the RBA will lower its cash rate target from a record-low 1.50 percent at its May 7 meeting, according to overnight interest-rate swaps on Wednesday. The Federal Reserve has raised its key rate nine times since December 2015 to 2.50 percent.

Brisbane-based money manager QIC has advised its pension fund clients to short the Aussie against havens such as the dollar and yen.

Modeling has shown the Aussie tends to fall when risk assets such as equities tumble, but the upside remains limited when stocks outperform, senior portfolio manager Stuart Simmons said.

“In a late-cycle environment such as where we're at now, the Aussie tends to have a low sensitivity to risk assets when they're going up,” he said. “But when risk assets are falling, that sensitivity re-couples -- you don't participate on the upside.”

Quay Global Investors also predicts the Aussie will decline.

“The next RBA move is likely to be a cut, likely in the third quarter of this year,” said Chris Bedingfield, principal at Quay in Sydney, who oversees a global real-estate portfolio. “The outlook for the Australian dollar under that scenario, frankly, is not particularly great.”

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds

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