Why the Great Aussie Dollar Collapse Still Looms in 2016

Australian One Dollar Coins over Black
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There would’ve been quite a number of glum faces around the Reserve Bank boardroom this morning. Overnight, the Aussie dollar gained on the greenback, hitting a high of US$0.71.

It’s disappointing because, as the RBA never fails to remind us, a weak dollar is a good dollar. Don’t ask them to explain why. They’ll mention something about tourism, or education. Apparently, these are the new pillars the Australian economy is hanging its hat on. Well, whatever works, right?

But the RBA needn’t worry too much. There’s a lot of bad news ahead in 2016 that should help destroy the Aussie dollar.

We’ll touch on that in a moment. But first to the US.

The greenback fell last night on the back of a decline in US durable goods orders figures. Basically, this refers to any goods which are non-consumable, like household appliances.

The numbers themselves are irrelevant. What matters is that they’re down. And it does nothing but add to concerns the US economy can’t shake the ills affecting the global economy. Exceptional as the US economy may be, there are limits to its isolation. The global economic slowdown has touched every financial system in the world.

It’s no surprise then that the greenback fell on the back of slowing durable goods orders.

But can it last? The short answer is no.

The Australian dollar might always gain from pessimism in the US. Anything that drives the US dollar lower will boost all other currencies. Yet consider how weak economic data affects fiscal and monetary policy in the US.

The obvious consequence of a slowing economy is that the Federal Reserve will cut rates. Weak durable orders, poor manufacturing numbers, higher unemployment; these things add up. And if you add up enough nasty looking figures, you come to the conclusion the US economy isn’t as robust as some would have us believe.

So what’s stopping another rate cut? Nothing. And if you’re wondering if that would only boost the Aussie dollar further, you’d be right. A US rate cut would, first and foremost, send the greenback down. Which, in turn, would force the AUD higher.

Not only that, but it’d have other indirect consequences.

Currency traders may start re-evaluating where they place their money. Capital outflows out of emerging markets might start pouring back in. A lower yielding US dollar would send traders searching for gains elsewhere. As has been the case for the past 15 years, emerging economies would benefit most from this.

A stronger developing world would lead to a rise in demand for commodities like iron ore. I’m making a lot of assumptions here, but that’d also lift commodity prices. Of course, that would push the Aussie dollar higher as well. In the RBA’s view, that wouldn’t be a positive development. Yet, it’s important to remember that a strong US economy has more bearing on the AUD. So if the emerging world is recovering, the US is too. And if its economy looks in better shape, a strong dollar, and weaker Aussie, would follow.

US GDP data to push up Aussie dollar next week?

By tomorrow, forecast Q1 GDP 2016 figures in the US are likely to show projected growth of 0.8%. Also due are the growth figures for Q4 2015. These are projected at 2%, but could fall below that. Weaker manufacturing activity may hurt GDP more than expected, which should devalue the US dollar even further.

When you combine that with weak oil prices, and a slowing global economy, it’s likely to sway the Fed towards keeping rates on hold. At a minimum, they certainly won’t be raising rates. It’d be reckless for the Fed to raise rates again so soon under such circumstances.

The likelier outcome is that they lower rates again. For a central bank that’s already indicated a willingness to do so, you wouldn’t put it past them.

Either way, with US rates at 0.25–0.5 for a while yet, it could push traders towards other, higher yielding currencies like the Aussie dollar. Moreover, commodity currencies, like the AUD, are receiving a helping hand from a slight recovery in oil and copper prices.

Again, not news the RBA likes hearing. But the positive for the Reserve Bank is that long term price forecasts across commodity markets remain poor. Despite gaining US$3 this week, it’s unlikely that we’ve seen the end of the oil price crash. A floor of US$20 (now at US$33) is not only possible, but probable.

Ultimately, there’s bigger threat of a global meltdown than there is of a recovery. You don’t even have to take an interest in finance to see that.

There are a number of ways this global economic crisis could unfold. Too many to name and give context to here. But you’ve heard about the likely catalysts a million times over by now. China, commodity prices, emerging economy slowdown, US economy, interest rates, housing crash…the list goes on. These factors are isolated, and at the same time completely intertwined.

But the outcome of this melting pot of problems leads us to the same conclusion. The pressures from it are going to send the Australian dollar much lower than it is at the moment. The only question is: how much lower?

Well, the Aussie dollar has already taken a hammering since 2011. There was a time, you’ll remember, where it was trading as high as $1.10 against the greenback. But in September 2015, it fell to a six year low of $0.69. That amounts to a 45% loss of value. And a 45% loss of purchasing power for the average Aussie consumer.

Yet as The Daily Reckoning’s Greg Canavan points out, that might only be the start. What you’ve seen up to now is a snapshot of the Aussie dollar crash unfolding as we head into 2016. Greg predicts the dollar could fall through the $0.60 level and plummet as low as $0.50 next year.

So how will it affect you?

Well, your eBay and Amazon shopping will become more expensive. You’ll need ever more cash to pay for your overseas holiday too.

Greg also says that property prices are likely to go even higher on the back of this. And should oil prices rebound, you could see a return to $1.80 a litre petrol at the pump.

Yet that might just be the beginning.

Greg says there are deeper and far more painful economic woes in store for Australia as the dollar hurtles lower. These are factors that could adversely affect you and your wealth. But these are things the mainstream media ignores more often than not.

However, there are steps you can take right now to protect your wealth from the coming Aussie dollar crash.

In a brand new Daily Reckoning report, Greg shows you why the Aussie dollar crash is inevitable. He’ll reveal a unique ‘crash protection’ investment to shield your wealth from the sinking dollar. To download the report, ‘Why the Aussie Dollar Will Crash in 2016’, click here.

Mat Spasic

Junior Analyst, The Daily Reckoning

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