Why the Aussie Dollar Will “Drop more than 15%”

Press today is running the latest headline of the Australian dollar forecast to sink to just 60c this year and into next.  If one combines that with our article yesterday on the USD potentially falling as well, you are served up the enticing confluence of a rising USD gold spot price and a falling AUD dollar, the latter further boosting the price of gold in our local currency.

From the Australian Financial Review:

“The Australian dollar is set to drop more than 15 per cent in value this year against the greenback, in an "even more bearish" updated forecast from Capital Economics.

Capital Economics sees the local currency falling to US60¢ this year and hovering there through 2020; it previously forecast it at US65¢ for 2019 and US70¢ for 2020.”

The reasons are threefold.  Lower interest rates, lower ore and coal prices off a worsening global economy and slowing China, and expectations of a deepening sharemarket correction in the US.

The first comes off Capital Economics last week revising down their forecast for our key interest rate as they see the RBA having to cut it to 1% from the current 1.5% amid a housing market crash.  Against the US’s rate of 2.25% that makes us an even less attractive place to park your international money.

We discussed the weakening China situation at length here last week and since then we have also seen the news the IMF delivered before Davos forecasting a weakening global economy and further premising "Risks to global growth tilt to the downside,".  They are citing the usual suspects of the trade war, financial market weakness and Brexit together with expected further weakness in Turkey and Europe.  The IMF appear particularly nervous about China stating:

"As seen in 2015-16, concerns about the health of China's economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure," (AUD gold rose 35% over that period)

And it’s that commodities pressure analysts and even the perpetually overly optimistic Government forecasters are so pessimistic about for the Aussie economy and its dollar.  Capital Economics have iron ore (currently fixed at $74.5/tonne) falling to $55 this year and $50 in 2020.  Morgan Stanley recently came out at $62 and $58 and Citigroup $63 and $60.  The Australian government forecasts $53 and $50.

Throw in similar issues for coal and LNG and that is the vast majority of our entire export market.  Since all we mainly do now is dig stuff up and ship it, and build houses and buy them, when combined with a weakening housing market you start to understand their concerns….

The final reason was the US sharemarket faltering and the falling appetite for risk more broadly citing "when that has happened the Australian dollar has tended to fall".  That also usually coincides with a rising gold spot price too.

Doing the math for you… the current spot price for gold is USD1284.  At the current 71.3c AUD/USD you have gold at AUD1800.  If the AUD drops to 60c, that becomes AUD2140, a 19% jump without the USD spot price changing one cent.  If the USD falls too (and spot gold inevitably goes up) you have the magic double whammy.