Australian Dollar Will Exceed $1, Antipodean Says (Update1)

By David McIntyre

Jan. 30 (Bloomberg) -- The Australian dollar will exceed $1 for the first time in more than 25 years as the nation's interest-rate advantage widens, said Craig Ferguson, a hedge- fund manager at Antipodean Capital Management.

The local currency may surge 24 percent to $1.10 by the end of 2008 as the Federal Reserve cuts rates and the Reserve Bank of Australia raises borrowing costs at least once, Ferguson said in an interview in Sydney. Rising prices of coal and iron ore, Australia's two most valuable export products, will also boost the currency, he said.

``The Australian dollar is one of the most undervalued currencies,'' said Melbourne-based Ferguson, formerly chief currency strategist at Australia & New Zealand Banking Group Ltd., the nation's third-largest lender. ``Commodities have kept going up and yield differentials have kept widening. The currency has done nothing because of uncertainty in equities.''

Ferguson, who correctly bet in November 2006 the Australian dollar would strengthen at least 18 percent to above 90 U.S. cents last year, said he expects the currency to trade between 83 and 93 cents until June 30 as stock market volatility persists, eroding confidence in higher-yielding assets.

The Australian dollar, known as the Aussie, traded at 88.78 cents at 3:51 p.m. in Sydney compared with 88.99 cents late in Asia yesterday. The last time the Aussie was worth more than $1 was in 1982, before the currency was allowed to trade freely in December 1983, according to data compiled by Bloomberg.

The Australian dollar will rise to 89 cents by mid-year before sliding to 85 cents by year-end, according to the median forecast of 39 analysts surveyed by Bloomberg News.

Widest Since 1991

The Fed may reduce its benchmark rate to as low as 1.25 percent by the end of the year from the current 3.5 percent, Ferguson said. That would take Australia's rate advantage to over 5 percentage points, the widest spread since 1991. The RBA will raise its rate at least once from 6.75 percent, he said.

``The Aussie could go on a run unlike anything we've seen in the last two years,'' said Ferguson in an interview with Bloomberg Television. ``In the second half of the year you have huge potential for the Aussie to move higher.''

Futures contracts on the Chicago Board of Trade show a 74 percent chance the Fed will cut its target rate to 3 percent today. The Fed unexpectedly cut rates by 75 basis points last week to help revive the U.S. economy.

Traders see a 72 percent probability the Reserve Bank will increase its 6.75 percent overnight cash-rate target by a quarter-point on Feb. 5, according to an index calculated by Credit Suisse Group based on trading in interest-rate swaps.

Immunity to Stocks

Gains in the Aussie will be limited while stock markets remain volatile, Ferguson said. Australia's dollar has fallen 3 percent against the yen this year as global equity markets slumped on concern the U.S. will slide into a recession.

``Until markets become immune to what stocks are doing, you're going to'' see the currency capped, Ferguson said. Antipodean plans in coming weeks to buy the Australia's dollar on any decline toward 85 cents and sell it on advances to 90 cents, he said.

The Chicago Board Options Exchange Volatility Index, or VIX, has averaged 23.16 the past six months compared with 13.98 the previous six. Higher readings in the so-called VIX, derived from prices paid for Standard & Poor's 500 Index options, indicate traders expect larger share-price swings.

``The case remains strong for further Australian dollar upside if and when risk appetite and equity market volatility stabilize,'' John Rothfield, a senior currency strategist at Bank of America Corp. in San Francisco, wrote in a report dated yesterday. He forecasts the currency to end the year at 91 cents.

Chinese Demand

Australia's dollar will also gain as the country's exports are boosted by a 50 percent increase in the cost of coal and iron ore, Ferguson said. Growth in China's economy won't slow until the end of 2008, underpinning demand for Australia's raw material exports, he said. Overseas shipments of commodities contribute about 17 percent to Australia's economy.

Demand from China for Australia's mineral resources has prompted companies including miner Rio Tinto Group to hire more workers and increase wages, increasing pressure on the RBA to raise interest rates.

While U.S. retail sales during the holiday season rose at the slowest pace since 2002, Australians increased spending in shops over the period at the fastest pace in a decade, according to the nations' retail associations.

Ferguson teamed up with Simon Ho, a former currency options trader at Deutsche Bank AG in Sydney, to form Antipodean, which began trading in February 2006. The two met in their first week as traders at JPMorgan Chase & Co. in May 1994. He declined to say how much in funds he has under management.

To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net

Last Updated: January 29, 2008 23:52 EST