Australian dollar: Barclays forecast impending Aussie investment slump as natural gas projects set to peak

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Category: Australian Dollar News

Written by Will Peters

The Australian dollar (Currency:AUD) is looking good on the currency markets during early trade in London. However, when we look to the future we see that this trend of a higher Australian currency could indeed by limited (see below).

The pound Australian dollar exchange rate is 0.21 pct in the red at 1.5510.

The euro Australian dollar exchange rate is 0.44 pct lower at 1.2377.

The Australian dollar to US dollar is 0.4 pct higher at 1.0477.

This morning analysts at Barclays tell us that we could see the peak of the current mining boom in Australia as early as 2013.

It is this mining boom that has primarily been responsible for the unyielding strength of the Aussie.

Questions about the sustainability of such a strong currency have recently been raised as the recent decline in commodity prices has led many investors to question whether the boom under way in mining investment is at risk.

Most analysts will however agree that the boom has further to run given that it is dominated by projects supplying natural gas to Japanese electricity producers.

However, Barclays believe that 2013 will see the peak of activity as once the gas projects draw to completion, business investment is likely to fall sharply unless additional mining projects come on stream.

"With export prices peaking last year, we expect business investment to peak next year as work draws closer to completion on several major natural gas projects. Investment is likely to slump in 2014 unless new mining projects come onstream,
such that overall growth should also slow very sharply that year," says Kieran Davies at Barclays.

That said, not everyone is convince Australia's mining boom does not have legs.

For an alternative view on the outlook, ANU Professor and former RBA Board member Bob Gregory has published an analysis of 200 major mining projects in conjunction with Victoria University’s Peter Sheehan.

This analysis points to a more sustained peak in investment than we expect, with project-related employment following a similar path.

Nevertheless the key scenario at Barclays remains that a slowdown is due.

"We expect a very large contraction in investment in 2014 and are therefore tentatively factoring in sharply slower growth in GDP that year of 2%," says Davies.

This will feed into the Australian dollar primarily through the RBA which would likely lower interest rates to compensate for falling economic activity.

Falling interest rates will thereby erode the attractiveness of Australia to overseas bond investors, thus weakening the currency.