Dollar and economy are in decline

The Australian dollar simply couldn’t hold its own on Tuesday – the momentum has turned against it and any bit of negative news hits it disproportionately hard. Our currency is in a classic bear phase.

It has now fallen 10 per cent in just one month, having dipped below US94¢ for a period on Tuesday, and while swings in its value are now a feature of trading the fact remains that it is on a fast trajectory down.

The dollar was sold off again in early European trading on Tuesday night and hit as low as US93.47¢.

The sluggish new home loan numbers provided traders with an excuse to sell the dollar. Make no mistake, the number of home loans approved edging ahead by 0.8 per cent was not a disaster and wasn’t bad enough under normal circumstances to move the currency.

But the mood around the Australian dollar has gone through 180 degrees over the past few months. Currency strategists have been busy revising down their forecasts, which only serves to place additional weight on the already pressured currency.

And this time most are not expecting the dollar dip to recover in any meaningful way but rather to continue to trend down until it reaches a new stable level between US80¢ and US90¢.

The only real divergence in the view from experts is whether it will take one, two or three years to get there. UBS for example is looking for the dollar to be US90¢ by June 2014 and longer term US85¢.

Goldman Sachs has cut its forecasts for the dollar to US85¢ to be reached within a year – previously it had been predicting the dollar to be US90¢.

National Australia Bank has revised its Australian dollar forecasts to US93¢ by the end of 2013 and US87¢ by late 2014.

The contrarian view among the major banks and investment houses comes from Commonwealth Bank, which reckons the dollar will recover ground over the remainder of this year and move to US96¢. However, the longer-term prognosis is broadly in line with the rest of the market.

CBA currency strategist Joseph Capurso takes the view that the US dollar’s strength may ease in coming months as the Federal Reserve sticks with the quantitative easing program a bit longer than people had expected.

It was the hint of the US central bank tapering off stimulus that sent the US dollar up three weeks ago and sent equity markets into a tailspin.

It also pushed up US bond yields and mortgage bond yields, which in turn should pour some cold water on the US housing market.

NAB currency strategist Ray Attrill has a different take. He thinks the Fed’s ”bias to taper” looks entrenched.

While the US dollar is the biggest influence on our local currency the fact remains that there are a number of other forces playing into the mix.

Asian investors that have been parking money in the dollar are no longer buying, while international hedge funds are taking big bets on our falling currency, providing momentum for it to fall further.

On top of these market forces the dollar is being buffeted by pieces of negative data and news, each of which puts it under additional strain.

The NAB’s Monthly Business Survey released on Tuesday painted a generally negative view of the Australian economy and confidence levels.

There is little evidence that the slowdown in mining investment is even close to being offset by increased investment from other industries. NAB has softened its medium term GDP forecasts to 2.8 per cent growth in 2012-13 and 2.3 per cent the following year.

Goldman Sachs also revised its numbers and the outcome was even more alarming, lowering 2013 economic growth from 2.4 to 2 per cent and 2014 from 2.7 to 1.9 per cent. ”While a recession in Australia is possible we believe there is still time for the economy to respond to the combination of better global growth, domestic policy stimulus and lower Australian dollar,” it said in a note.

It is increasingly clear that the interest rates cuts of this year and last have not translated into increased spending from consumers or business.

The Reserve Bank – which cut 25 basis points off interest rates in May – was looking to weaken the Australian dollar and in this respect it has been a major success.

If the dollar’s devaluation is sustained it would provide respite for our ailing manufacturing sector and improve its global competitiveness. But, according to NAB, a lower dollar and interest rates will not be enough to prevent unemployment from rising.

The numerous weak data has increased the betting on the Reserve Bank moving to cut interest rates again in July and potentially in August as well.

Where only a few weeks ago the experts were predicting one more rate cut later in the year, there are now bets on 50 basis points being shaved off the cash rate within months.

The original release of this article first appeared on the website of Hangzhou Night Net.

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