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Aussie may fall below $0.60-UK hedge fund

Once a darling of carry trade due to Australia's interest rates, which rose to as high as 7.25 percent in March, the Aussie tumbled to a 5-’year low in late October as risk-wary investors fled carry trades on fears of a global recession.

Steep cuts in U.S. interest rates earlier this week lifted the Aussie to a two-month above $0.70 on Thursday but the rise is likely to be short-lived, said Russell Thompson, chief investment officer at London-based Cambridge Strategy hedge fund.

‘My view is that the Aussie is a sell. These are good levels to be going short Aussie,’ he said on Friday, predicting that it may drop more than 10 cents to below $0.60 before March as China's abrupt slowdown aggravates slackening global demand for commodities.

Lower commodity prices are bad for Australia because it is a major commodities exporter. The Reuters-Jefferies CRB index, a commodity index that tends to lead gains or losses in the Aussie, has skidded nearly 39 percent so far this year.

Morgan Stanley said this week the Aussie may fall below $0.50 by June 2009 as falling commodity prices and a shortage of funds for private firms tip Australia into a recession.

The forecast was one of the most bearish in the market. A Reuters poll of 44 economists showed earlier month a median forecast of $0.62 in the next three to six months.

Cambridge, which manages $850 million worldwide, of which $400 million is in Asia, shorted the Aussie before closing the investment in November, Thompson said.

Its Asian fund has gained about 4.5 percent since it was launched in March. Against the U.S. dollar, the Japanese yen gained about 15 percent in that period, and the New Zealand dollar lost about 38 percent.

Thompson said carry trades are unlikely to make a comeback in the next six months because financial markets are too choppy for risky trades, and falling interest rates around the world have reduced the yields of previously high-yielding currencies.

Carry trades are seen as risky because investors take on debt by borrowing a currency with low yield, such as the yen, to buy higher-yielding currencies.

The Aussie, which touched a 5-1/2-year low of $0.6004 on October 27, has dived about 22 percent against the U.S. dollar this year. It has dropped 58 percent against the yen.

‘Is the carry trade dead forever? No, of course not. Is it dead for the next three to six months? Yes, I would say it probably is,’ Thompson said, adding the safe-haven yen should outperform other currencies in 2009.

He said the outlook for emerging market currencies was bleak in 2009 because foreign direct investment, a key driver of emerging markets, has slowed in the face of the global recession.

Cambridge is long on the Japanese yen, the Chinese yuan, the euro and the sterling, he said.

He said the firm is short on the Taiwan dollar, the Swedish crown, the Russian rouble, the Polish zloty, the Hungarian forint, and the South African rand.