How low will dollar have to go?

UBS is out cutting its Australian dollar forecast to 85 cents:

…replacing the lost (domestic) growth from mining capex over the next few years will critically need more than just a moderate housing recovery (which is clearly underway). The economy’s successful transition will need a lift in non-mining capex and activity to both support growth directly and consumers indirectly via jobs. However, despite borrowing rates having been stimulatory for a while, an economy-wide lift in nonmining capex growth has yet to materialise. Indeed, further modest reductions in an already low cash rate are likely less beneficial than a further significant fall in the AUD for many businesses concerned about their future competitive viability (while lower cash rates may also encourage financial problems elsewhere).

…Finally – and most importantly – as Charts 1 & 6 clearly show, it would seem misplaced to believe that the recent drop in the AUD from USD1.04 to USD0.92 is ‘low enough’ to be confident of the economy’s successful transition. Indeed, to get the lift in non-mining capex the RBA is looking for would appear to require something closer to USD0.80, at the very least.

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Dead right. But it’ll take lower than 80 cents this time. Business has been fed a line that the dollar will be high forever and has been preparing accordingly. Capacity has been idled or strategies re-oriented. It will take a much lower dollar for much longer to persuade anyone to invest on the old normal.

Comments

      • I’d like to see greg have a crack at a bit of interpretation of those charts!

        It might be moot as to whether the past will be any guide here. It’s obvious to anyone who lives in the real world that during the last few years we have so screwed this economy towards a non-productive bias that one has to wonder at just what exchange rate people might start investing again. At best it looks like we are going to get one of those major diversions between the A$/USD and non-mining capex ratios for a considerable period.

        I really wish I was in the bleaches eating popcorn to watch this. Unfortunately I’m not and it scares the living daylights out of me!