SYDNEY--The Australian dollar is about 20% over valued and vulnerable to a sharp correction amid a slowing domestic economy and downward pressure on commodity prices, a top Goldman Sachs Group Inc.
GS +1.72% strategist said in an interview Wednesday. "You can make the case now that the Aussie may have peaked out and may be heading south quite substantially," said Thomas Stolper, chief currency strategist at the U.S. investment bank.
Goldman's central expectation is for a gradual weakening but if commodity prices fell substantially then a correction as low as US$0.6500 over the medium term could result, Mr Stolper said.
Known as the Aussie dollar the currency continues to trade above parity against the greenback and remains near historic highs versus other rivals even after a large fall in iron ore and coal prices.
Prices for iron ore, Australia's biggest export, have recovered to US$117.20 a ton from the three year lows of US$86.70 a ton struck on Sept. 5 but remain well below the US$135.50 a ton traded three months ago.
Some of the currency's ongoing strength is attributed to record central bank buying of Australia's bonds to capture the high yields offered by the nation's triple-A securities and to diversify away from the troubled euro zone.
But that demand has now likely topped out, stripping away a key support plank, said Mr. Stolper. "It is almost certainly a clear slow down in terms of inflows coming from central banks particularly into the Australian dollar," he said.
Slower Chinese growth, interest rate cuts by the Reserve Bank of Australia and tighter fiscal policy are also working to stymie the Aussie, Mr. Stolper said, and he pushed back at suggestions the currency has become a so called 'safe haven' saying it is still welded to swings in investor sentiment during volatile periods.
"It has become a reserve currency without any doubt but that doesn't mean it's a safe haven currency," he said.
The London based strategist said "one of the best long term trades out there at the moment is long euro versus short Aussie," a tactic described by Goldman's Australia economist Tim Toohey as a possible "trade of the century."
Mr. Stolper noted the pairs long run average is around A$1.70 compared with the A$1.250 being traded late Wednesday in Sydney. "It's great for Aussies going on holidays but I'm not sure how long it's going to last," he said.
marketwatch.com
GS +1.72% strategist said in an interview Wednesday. "You can make the case now that the Aussie may have peaked out and may be heading south quite substantially," said Thomas Stolper, chief currency strategist at the U.S. investment bank.
Goldman's central expectation is for a gradual weakening but if commodity prices fell substantially then a correction as low as US$0.6500 over the medium term could result, Mr Stolper said.
Known as the Aussie dollar the currency continues to trade above parity against the greenback and remains near historic highs versus other rivals even after a large fall in iron ore and coal prices.
Prices for iron ore, Australia's biggest export, have recovered to US$117.20 a ton from the three year lows of US$86.70 a ton struck on Sept. 5 but remain well below the US$135.50 a ton traded three months ago.
Some of the currency's ongoing strength is attributed to record central bank buying of Australia's bonds to capture the high yields offered by the nation's triple-A securities and to diversify away from the troubled euro zone.
But that demand has now likely topped out, stripping away a key support plank, said Mr. Stolper. "It is almost certainly a clear slow down in terms of inflows coming from central banks particularly into the Australian dollar," he said.
Slower Chinese growth, interest rate cuts by the Reserve Bank of Australia and tighter fiscal policy are also working to stymie the Aussie, Mr. Stolper said, and he pushed back at suggestions the currency has become a so called 'safe haven' saying it is still welded to swings in investor sentiment during volatile periods.
"It has become a reserve currency without any doubt but that doesn't mean it's a safe haven currency," he said.
The London based strategist said "one of the best long term trades out there at the moment is long euro versus short Aussie," a tactic described by Goldman's Australia economist Tim Toohey as a possible "trade of the century."
Mr. Stolper noted the pairs long run average is around A$1.70 compared with the A$1.250 being traded late Wednesday in Sydney. "It's great for Aussies going on holidays but I'm not sure how long it's going to last," he said.
marketwatch.com
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