Australia’s dollar offers value in the high 60 US cents region as the economy successfully navigates the downturn in commodities, and amid signs China is stabilising, according to Principal Global Investors.
The economy’s ability to transition towards areas including services, housing construction, healthcare and education has been “amazing,” said Principal’s chief economist Bob Baur on a visit to Sydney last week. The fund manager, which oversees about $340bn from its headquarters in Des Moines, Iowa, also sees reason for optimism in Chinese data such as retail sales and consumer confidence, which have been robust, while purchasing manager surveys are no longer deteriorating, he said.
Baur’s view is similar to the Reserve Bank of Australia’s, which on Friday cut its unemployment forecast and maintained an expectation for accelerating growth as services drive job creation. Traders are less optimistic. Swaps yesterday indicated a 72% probability that the central bank will cut its record-low benchmark of 2% within the next six months to insulate the economy from the winding down of a mining investment boom and ructions in China. The Aussie dollar has climbed 3.9% since dropping to a seven-year low of 68.27 US cents on January 15.
“Frankly, the Australian economy is doing quite well - it’s amazing how well it has taken this cyclical resource market,” Baur said on Friday. “It certainly continues to do really better than I would have thought. I guess when you stop to think about it, there are not all that many people employed in resources.”
Australian policy makers have been drawing comfort from a labour market that added the most jobs since at least 1978 in the final quarter of last year. The unemployment rate held at a two- year low of 5.8% as 129,000 jobs were created in the three months through December. Data from Australia & New Zealand Banking Group published yesterday showed job advertisements increased by 1% in January.
Low wages and a depreciation in the local currency are help to restore the international competitiveness of the labor force, the central bank said in its quarterly monetary policy statement. The bank also raised its forecast for household income growth in the Friday update.
That said, with the inflation rate remaining low and the central bank expecting little upturn, it gave some succor to those betting on rate reductions by reiterating that there may be “scope for easier policy, should that be appropriate to lend support to demand.”
Australia’s dollar was at 70.96 US cents in Sydney yesterday, having dropped 36% from a record high of $1.1081 reached in 2011. A Bloomberg survey of analysts projects that it will fall to 68 by the middle of this year and end 2016 at about 69.
At 68 cents to 69 cents, the nation is more cost competitive and may even see the return of manufacturing investment, Baur said.
Weighing against the domestic outlook has been uncertainty about the growth path of China, Australia’s largest trading partner. The Asian nation devalued its currency in August and undertook an eight-day stretch of weaker yuan fixings through January 7, roiling global financial markets and fueling concern it was resorting to depreciation to revive the slowest growth in a quarter century.
“I think China is more interested in a stable currency,” Baur said. “If you follow the yuan against a basket, it’s mostly stayed within a flat range and further, a weak yuan is not going to help China turn into a consumer society - to be a strong consumer generally goes with a stronger currency.”
Recent market turmoil to some extent reflects concern among investors about the ability of Chinese authorities to manage an economic transition, the RBA said. A sharp slowdown in activity or an increase in financial stress in China could potentially infect other economies in the region and commodity prices important to Australia, it said.
“As best as I can tell, China’s economy seems to be stabilising,” Baur said. “At some point down the road they are going to run out of levers to pull to keep things going, but I think that day of reckoning, if indeed it does come, is down the road. It’s not here yet.”