Morgan Stanley has predicted that the Australian dollar could fall to US$0.68 by the end of 2015. Moreover, the investment bank sees the Aussie dropping to US$0.62 by the end of 2016.
Such a scenario would undoubtedly come as relief to exporters nationwide. A lower dollar has been the prescribed tonic to spur an export driven recovery. But how realistic is the probability of such a sharp fall in the AUD?
It would be quite a turnaround considering how difficult it’s proven to devalue the dollar in recent months. Since February, the AUD has fluctuated stubbornly between US$0.76 and US$0.81. That’s come to the chagrin of the RBA who have been hoping to use looser monetary policy to drive it down to around US$0.70.
But interest rate cuts have failed to lower the dollar to the RBA’s desired target. Recently, that’s forced the RBA to rethink their position, revising their target to US$0.75.
On top of rate cuts, weaker economic data has only slightly affected the dollar. But that’s failed to provide any permanent devaluation in the AUD.
Why Morgan Stanley is convinced that the Aussie dollar faces a dramatic collapse
Morgan Stanley put the coming collapse in the AUD on poor economic data and future interest rate cuts.
It would seem counter-intuitive at first. It hasn’t really worked up to now, so why would it be any different in the future? But maybe there is some method to the madness.
We’ve never had rates at the current 2% level before. Yet we’ve also never had the cash rate at 1.75% either. For all intents and purposes we’d be entering uncharted territory. Theoretically, that may throw up conditions that could conspire to drive down the dollar. Or maybe it won’t. It’s a fool’s game trying to guess at this point.
Nonetheless, Morgan Stanley predict that soft economic data will eventually force the RBA to cut rates by 25 basis points in the fourth quarter. The good (or bad) news is that we’re going to see plenty more disappointing data in the months ahead. It’s already beginning to cascade as is. Consumer confidence and business spending is flopping.
At the same time the trade deficit continues to increase on the back of depressed exports. The recent commodity price rebound is just a temporary reprieve. Several investment banks have indicated that prices will continue to fall over the next few years.
Such poor economic forecasts could be enough to weigh down on the dollar. But again, our recent experience shows that doing so is easier said than done. We’ve had months of poor economic data that has done nothing to shift the position of the dollar. That makes it difficult to see how the AUD is meant to fall by over US$0.10 in the next six months.
Will the US dollar come to Australia’s rescue?
The US dollar’s strength could hold the key to driving down our currency. If our American partners can convince markets to push up the price of the US dollar, then we’d benefit from that.
Morgan Stanley predict that US data will show signs of economic resurgence over the coming months. If they’re right, that may be the likeliest chance for the Aussie dollar to fall below US$0.70. But that’s a big if.
No one should be putting the hopes for the Aussie dollar on a US recovery.
Contributor, The Daily Reckoning
PS: The Daily Reckoning’s Greg Canavan believes we’re headed for disaster, with or without a weaker dollar. He believes that RBA policymaking will fail to prevent the economy’s near certain decline. In fact, as one of Australia’s leading investment analysts, Greg is convinced that Australia faces a recession in 2015.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show you why our economic conditions have spiralled out of control — and why that means a recession is almost inevitable.
But he also wants to show you a way to protect your wealth. Greg believes there are steps you can take right now to protect yourself from the fallout of the imminent recession. To find out how to download his free report right now, click here.