* Commodity currencies could see erosion of big gains since
* Fund managers see falls in Australian, Canadian, NZ dlrs
* Some see Aussie as low as $0.95, CAD at C$1.05 in a year
By Jessica Mortimer
LONDON, May 7 The Australian, Canadian and New
Zealand dollars may be set for a decline, dragged down by a
slowdown in China and a sharp fall in commodity prices.
Tuesday's 0.8 percent slide by the Aussie versus the U.S.
dollar, prompted by a rate cut, was just a foretaste.
The Australian and New Zealand dollars are up 70 percent
against the U.S. dollar since late 2008, driven up by near-zero
rates in many developed countries. The euro zone crisis also led
investors and central bank reserve managers to seek
higher-yield, low-risk assets.
The Canadian dollar has gained around 30 percent.
Some analysts see all three currencies as overvalued, with
worsening outlooks at home making rate cuts more likely.
The Reserve Bank of Australia cut rates on Tuesday to 2.75
percent and signalled more could come as a strong currency
damages Australia's economy. Interest rates in
New Zealand are 2.5 percent and in Canada 1 percent.
"We have underweight positions in these currencies," said
Jonathan Davies, head of currency strategy at UBS Global Asset
Management, speaking before the Australian rate cut.
While major developed economies suffered after Lehman
Brothers collapsed in 2008, strong Chinese growth fuelled demand
for commodities and sparked a boom in mining in Australia, dairy
production in New Zealand and oil in Canada.
But Chinese growth has slowed this year and commodity prices
have fallen, with gold down 8 percent since the start of
2013, copper down 5 percent and Brent crude down
2 percent. Australia is seen as particularly vulnerable because
China is the main importer of its natural resources.
"The fundamental case for a weaker Australian dollar has
been growing and it is a very compelling trade now to be
underweight in Australian dollars," UBS's Davies said.
Falls in commodity-linked currencies have lagged a recent
slide in commodity prices, suggesting the gap should close.
Indeed, charts show the correlation between the Australian
dollar's performance and that of gold and copper
has tightened in recent weeks. The Canadian dollar has also been
more closely correlated with crude oil prices .
"A lot of the excitement about the Australian dollar was as
a proxy - a proxy to China, a proxy to commodities, said Ken
Dickson, investment director at Standard Life Investments. "But
it's overvalued and China's growth strategy is in transition."
He holds a short Australian dollar position against the
Mexican peso, whose growing manufacturing sector
would benefit if China slowed while the U.S. economy improved,
and favours short Canadian/U.S. dollar positions.
Dagmar Dvorak, director of fixed income and currencies at
Baring Asset Management, said the Australian and Canadian
dollars were "among the most overvalued currencies we look at".
FALLS LATER THIS YEAR
Ian Stannard, currency strategist at Morgan Stanley expects
commodity currencies to fall significantly in the second half of
the year, "when we start to see the cracks appearing in China."
He saw the Australian dollar as most vulnerable and forecast
it would hit $0.95 in 12 months.
The Australian dollar hit a 3 1/2-year low against the New
Zealand dollar and a six-month low against the
Canadian dollar after Tuesday's rate cut.
However, some analysts said bets on commodity currency falls
were risky as China might yet escape a significant slowdown,
while the trio's triple-A credit ratings and interest rates
could attract central bank reserve managers for some time yet.