Via Gotti today:
The Australian dollar and many other world currencies last night got a taste of what looks to be ahead.
…Officials at the Reserve Bank of Australia will be watching the currency closely. If it holds above US70 cents there will be no pressure to raise interest rates.
But if it were to go into free fall that would be a different story.
Given the current strength of the Australian economy that’s unlikely but when traders see a central bank boxed in and not able to raise interest rates without damaging the country they often raid the currency and trash its value.
As noted yesterday, the pressure on the Aussie to keep falling is intensifying as the negative spread deepens. Were the Fed to hike four more times it would look like this:
But there is an offset. The terms of trade have been strong and they are other big input into the currency value:
With China beginning to stimulate building to offset the trade war headwinds, bulk commodity prices will be OK and support the terms of trade next year so I can’t see the Aussie dollar entering free fall. A grind lower into the mid and high 0.60s is still the base case next year, unless the RBA is forced to cut by the housing correction.
At least until the next end-of-cycle shock when I see the Aussie crashing deep into the 0.50s.
David Llewellyn-Smith is chief strategist at the MB Fund which is long US equities that will benefit from a falling Australian dollar so he is definitely talking his book (or Gotti is!). Below is the performance of the MB Fund since inception:
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