As the Aussie dollar fell to US$0.69 yesterday, thoughts are turning to what’s next for the local currency. Can the Aussie stabilise below $0.70 against the greenback in the long run? And just how far will it fall over the next 12–18 months?
Answering these questions was difficult just a few months ago. There were emerging signs the global economy was unravelling. Now there’s no question that we’re in the midst of a global cool down.
What’s playing out on markets now suggests we’re in for a prolonged slump. For better or worse, that gives us an insight into the future of the Aussie dollar.
This coming decline foreshadows a steeper fall in the dollar than you might expect. It’s not outlandish anymore to suggest a floor of $0.60 by 2017 for the Aussie. That would be a far cry from the $0.94 it traded for just 12 months ago.
Depending on your point of view, that could be either good or bad news.
On the one hand, it bodes well for Australia’s exporting sector. A weaker dollar helps make Aussie exports more competitive. Right now, the economy needs all the help it can get. At present, the Aussie economy is too reliant on consumers to raise demand. Boosting exports is the quickest route to sustainable growth.
On the other hand, a $0.69 currency won’t benefit Aussie consumers. Taking trips or buying overseas goods, may become much more expensive over the next 18 months.
For the sake of the economy however, let’s call this an encouraging development. What’s more, the Aussie won’t reach $0.60 overnight. This will be a drawn out affair, and we can expect to see upward swings from time to time. In the shorter term, the dollar should settle in a band between $0.68 and $0.71.
Aussie dollar hit by coming recession
The outlook for the Aussie economy took a slide on the back of yesterday’s GDP figures. Economic growth in the quarter to June came in at 0.2%. That’s a big fall from 0.9% growth in Q1. Worse still, it raises the prospects for a recession in Q3.
Other commodity currencies, like Canada and Brazil, are already in recession. Australia won’t be far behind. I recently wrote about why Australia’s next in line. You can read that article by clicking here.
But a potential recession, however likely, is only a symptom of the world’s ills. We’re heading towards a downturn because our major trading partner, China, is sick.
China’s economy is coming under sustained pressure. And its desire for a ‘soft landing’ is looking less likely by the day. None of which bodes well for Australia’s own fortunes.
Take Chinese manufacturing data for August. Slowing factory activity played a major part in the Aussie dollar’s drop to $0.69 yesterday.
Worryingly, there’s no sign that things will improve in China anytime soon.
In fact, everything suggests they’re set for a sustained decline over the next few years. Trade terms are down, manufacturing is falling, and growth is stalling.
The government will do all it can to soften these blows, postponing the fallout for as long as possible. We’ll see further rate cuts, and more government funds propping up stocks.
But none of that will help Australia. We need Chinese demand for steel to rise again. Iron ore on its own accounts for one fifth of all export revenues.
Barring that, commodities revenues will continue their slide. As Chinese demand for iron ore and coal drops, it’ll drag on the dollar too.
At the same time, another cloud hanging over the dollar is US interest rates. At some point next year, the US Fed will begin hiking rates from near-zero. Once it does, it’ll put more pressure on the dollar. A rising US dollar weakens the Aussie dollar by default.
So that’s what’s in store for the dollar. China’s ongoing slowdown hurting Australia, US interest rates, and recessions. Keeping the dollar above $0.60 will take a miraculous swing in global fortunes. Don’t bet on that happening.
Contributor, The Daily Reckoning
PS: The Reserve Bank decided to keep rates on hold at the current 2% low this week.
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