Top Forecaster Sees Aussie’s Stellar Gains Coming to an End

(Bloomberg) --

The top-ranked forecaster of the Australian dollar sees the currency’s remarkable rally losing steam as a rebound in iron ore prices and Chinese manufacturing cools.

Jason Schenker, the Texas-based president of Prestige Economics LLC, projects the Aussie will edge about 1.5% higher to 73 U.S. cents by year-end and to 74 cents in early 2021. That’s after it surged more than 30% from an 18-year low in March.

“You’re not likely to get this catapult up two years in a row,” said Schenker, who worked at McKinsey & Co. and Wachovia before starting his own company. “We’re still expecting positive growth but there’ll be some deceleration,” he said of the currency.

Schenker hasn’t set foot in Australia or China during his 16-year run of forecasting the Aussie. Instead, he puts greater store in studying key commodities and factory gauges like China’s manufacturing purchasing managers’ index.

The pace of recovery in China’s official manufacturing PMI has slowed to incremental gains in recent months after surging more than 40% earlier in the year from a pandemic-induced low. Increases in the price of iron ore, Australia’s top export to China, are losing momentum after gaining about 32% this year.

“You only recover from a once in a century pandemic once in a century,” said Schenker, who has written books including The Future After COVID. “We’re settling into a period of seeing improved growth, but industrial metals are not going to have as nearly a robust a year next year.”

Rising political tensions between the Chinese and Australian governments also threaten to curb gains in the Aussie. In the latest development, Beijing has suspended purchases of Australian coal, according to people familiar with the order.

“We take the reports seriously enough certainly to try to seek assurances from Chinese authorities that they are honoring the terms of the China-Australia Free Trade Agreement and their WTO obligations,” Australian Trade Minister Simon Birmingham told Sky News.

Schenker’s fourth-quarter Aussie forecast is slightly above the 72 U.S. cents median of strategists surveyed by Bloomberg.

The currency traded around 71.95 U.S. cents at 9.52 a.m. in London on Tuesday.

In Schenker’s analysis, China’s manufacturing and industrial metal prices matter more than even the Reserve Bank of Australia’s monetary policy.

He said that living in Texas, a major oil hub, keeps him attuned to commodity markets.

“Our economies are of comparable sizes as well -- Australia and Texas -- and that’s helped,” Schenker said. “Our expectations around the macro piece turned into an accurate forecast.”

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