AUD surge may signal good times for the global economy

To gauge whether the global economy is finally picking up, take a look at the performance of the Australian dollar since the end of June.

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Driven by rising local bond yields and commodity prices, the Aussie is the strongest major developed currency over that period, and some analysts are forecasting further gains to an 18-month high. Goldman Sachs Group Inc. and Commonwealth Bank of Australia say inflation in the nation has bottomed, while traders are starting to speculate that policy makers are done with easing. The world’s fifth-most traded currency climbed for a third day on Tuesday after the Reserve Bank of Australia left its benchmark interest rate unchanged and said consumer-price gains are likely to pick up.

Australia’s economy, the 12th largest globally, sits astride emerging and developed markets, making the currency a favored bellwether for worldwide growth. As the biggest iron-ore exporter and a major supplier of coal, wool, gold and liquefied natural gas, the country’s fortunes are wedded to those of China. But the South Pacific nation is about more than just raw materials -- tourism and education are also major exports -- and the Aussie is the highest-yielding AAA currency. That combination helped it lead a resurgence in developed markets in 2009 as the dust settled after the global financial crisis.

“Australia remains exposed to China’s industrial cycle and the latter is clearly tied to the fate of global growth,” said Vasileios Gkionakis, head of global foreign-exchange strategy at UniCredit SpA in London, who was second in a Bloomberg’s ranking of Australian dollar forecasters for the third quarter. “A turn-up in global inflation would mean that higher-yielding currencies would benefit on the back of higher yield spreads. So the likes of Aussie would be likely to experience increased demand.”

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Unwinding Stimulus

Right now, the Antipodean currency is reflecting a brightening outlook. Global bond yields surged in October, on speculation central banks were preparing to gradually scale back extraordinary stimulus measures, while market expectations for consumer prices started to accelerate, albeit from low levels. Aussie yields rose more than any nation with the top credit scores from all three ratings companies and only Italy and the U.K. outpaced them among developed economies.

The extra yield on Australia’s 10-year bonds over their U.S. counterparts more than doubled from lows in August and the Australian dollar benefited from that rising premium. The currency has jumped 2.4 percent since the end of June as the outlook for inflation improved on a surge in commodity prices, and as traders trimmed bets the Reserve Bank of Australia would cut interest rates.

The Aussie rallied 28 percent in 2009 as the global economy recovered from the collapse of Lehman Brothers Holdings Inc. and the ensuing recession. It has advanced 4.7 percent this year, on course for its first annual gain since 2012. While its three-year slide helped the economy combat a decline in mining investment, an appreciating exchange rate may complicate that process, the central bank said in Tuesday’s policy statement.

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Three Quarters

There are further reasons to be optimistic. For the first time in six years, the price of Australian exports has risen for three straight quarters, boosting national income and tax revenue. A rally in energy prices is also supporting the outlook for growth in consumer prices. The 10-year inflation swap and the break-even rate are both at six-month highs.

Traders are signaling the current record-low RBA cash rate may be the bottom of an easing cycle that began in late 2011. The market implied probability for a reduction through the end of 2017 has fallen to 30 percent from almost 50 percent odds seen at the end of September.

The Aussie may appreciate to 80 U.S. cents by the end of next year, according to UniCredit and ING Groep NV, from 76.29 cents as of 7:28 a.m. in London on Wednesday. The median estimate of analysts is for the currency to weaken to 74 U.S. cents, data compiled by Bloomberg show.

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Commodity Rally

The currency has also drawn strength from rising prices of metallurgical coal, which have tripled, and the 48 percent surge in iron ore in China this year, helping boost Australia’s terms of trade after more than two years of declines.

The economy will expand 2.9 percent this year, the fastest since 2012, and growth will remain at that level through 2018, according to Bloomberg surveys of analysts. Inflation will accelerate in the next two years, while global growth will quicken to 3.2 percent in 2017 and 3.3 percent in 2018, from 2.9 percent this year, analysts project. The RBA will release its quarterly Statement on Monetary Policy on Friday, with updated growth and inflation forecasts.

“The Australian dollar can act as a barometer of global economic sentiment,” said Richard Grace, chief strategist at Commonwealth bank of Australia in Sydney. “The nation’s terms of trade, local economic conditions and Asian export growth go some way in pointing to the health of the global economy. Other factors such as the nation’s relative interest rates are also important drivers for the currency.”