The Australian dollar has already fallen a long way – a peak of US$1.10 in late 2011 and 0.95 from four months ago to under 0.87 at the moment.
Some might suggest that this sort of depreciation is sufficient given the still upbeat outlook for growth from the RBA and a bunch of other optimists, and the fact that the world’s largest economy, the US, is looking entrenched in its long awaited recovery from the Lesser Depression.
The influences on the Australian dollar at the moment are very ugly.
The oil price (west Texas intermediate) is under US$90 a barrel, iron ore is under US$80 a tonne, gold is floundering around $US1,190 an ounce and copper is under $3.00 a pound.
The terms of trade, already down around 25 per cent from their peak, are set to fall further – possibly by a large amount.
This would not be too much of a worry if the domestic economy was showing signs of robust growth. Alas, the opposite is happening. Retail sales are sluggish, recording no growth in real terms over the last couple of quarters. House building approvals are also flat to down, having peaked some six months ago. Add to that a bout of fiscal austerity as the government ignores economics and tries to urgently move to budget surplus and it makes it very difficult to create a scenario where GDP will grow at 3 per cent or more.
What’s more, the unemployment rate has been above 6 per cent for the last two months, something that Australia has not seen for 12 years. Wages growth is also falling in real terms and the Westpac measure of consumer sentiment has been below 100 index points for seven straight months. It is just about impossible to see GDP growth near 3 per cent if these trends continue.
Unfortunately, things are deteriorating.
When the penny drops at the RBA and it realises that disinflation will be a greater threat than inflation in the year ahead and it moves to cut interest rates, another critical support for the Australian dollar will be gone.
Who knows how low the Aussie dollar will go. A case can already be made for an exchange rate of 0.80 – falls beyond that seem likely once the markets deal with on-going bearish news. As noted before, Deutsche Bank went out on a limb earlier this year suggesting 0.66 was on the cards for 2015 and it looks increasingly likely that that Black Swan forecast will be close to the mark.
*This is just general advice – trading foreign exchange is high risk and subject to many variables. Seek alternative views when deciding to enter a foreign exchange trade.