Via Barclays:
We see AUD under-performance against G10 currencies.
Australia’s growth and inflation are likely to remain subdued. Given its late-cycle position, secular adjustments in the commodity sector and downside risks to construction activity and investment.
The AUD remains overvalued and its carry advantage over the USD is likely to continue to narrow, with the US leading in monetary tightening into H2 2018 by our forecasts.
China’s economic rebalancing, corporate deleveraging and curbs on property speculation mean that any rebound n commodity prices is unlikely to be durable. Our commodity analysts forecast China sensitive commodity prices to remain suppressed.
Too right. I can see the Aussie dollar falling a long way next year as the US tax cut boomlet forces Fed hikes just as the end of China’s stimulus boomlet crashes into the Australian terms of trade. If the two were to strike the currency simultaneously then both the carry trade would collapse as interest rate spreads turning negative:
And the fundamental commodity income flows evaporate. We can see this in the history of the relationship between the trade-weighted index (which the currency plus inflation) versus the terms of trade:
Where one goes, the other follows.
———————————————————————–
David Llewellyn-Smith is chief strategist at the MB Fund which is currently long local bonds and international equities that offer superior growth and benefit from a falling AUD so he is definitely talking his book.
Here’s the recent fund performance:
Source: Linear, Factset
The returns above include fees and trading costs on a $500,000 portfolio. Note that individual client performance will vary based on the amount invested, ethical overlays and the date of purchase. The benchmark returns do not include fees. October monthly returns are currently at 4.9% for international and 4.2% for local shares.
If the themes in this post and the fund interest you then register below and we’ll be in touch:
The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. The MB Fund is a partnership with Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.
