From the AFR:
US dollar strength, weak commodity prices and a cooling domestic property market could push the Australian dollar below current levels, says Morgan Stanley, although future LNG exports will ultimately keep it above long-term averages.
The US investment bank on Tuesday placed a US82.6¢ fair value on the local currency…
“We expect the Australia-US two-year bond yield spread to narrow significantly from current levels of 200 basis points to 50-100 basis points in a year, and possibly about zero on a two-year views,” Morgan Stanley said.
…“Over the next four years, Australia’s LNG exports should roughly quadruple as seven LNG projects move into production,” Morgan Stanley said.
“While a significant share of the LNG revenues will be repatriated offshore, it will materially improve Australia’s current account balance.”
Perhaps, but that won’t help the currency and I’ll tell you why. The Australian economy only grows by finding some income growth (usually from commodities) and leveraging the shit out of it by borrowing offshore and pouring it into a spectacular property bubble which drives consumption that in turn sucks in imports. It is step two which generates most domestic activity growth and if you take it away step then the current account deficit will improve dramatically but the economy will stall leading to rate cuts and a lower currency.
Conversely, the only way to grow at trend is to keep leveraging the income into property via offshore borrowing so if growth is stronger then the current account will by definition be weaker, which in a sane world will also weaken the currency (but the world is not sane given ZIRP everywhere else).
Given authorities seem to be moving to sit on step two via macroprudential rules, the current account should actually improve as housing slows and growth remains weak so the currency will keep falling.
MS sees 84 cents this year and 76 cents in 2015. They’re probably right given nobody in markets seems to understand how the miracle economy actually works. If they did, or they wake up, it will fall much further and faster.
