Capital Economics: Australian dollar to fall to 60c

by Chris Becker

The crew at Capital Economics are out with another very bearish forecast, reckoning the Pacific Peso is going to crash to 60c this year against the USD. After last week downgrading its longer term forecast for the RBA’s move on interest rates – with a view of 1% as the housing market implodes – this is no suprise.

More from AFR:

Capital Economics sees the local currency falling to US60¢ this year and hovering there through 2020; it previously forecast it at US65¢ for 2019 and US70¢ for 2020.

“While we have been negative on the prospects for the exchange rate for some time, we previously thought that relative interest rate expectations would prevent it from falling too far,” Simona Gambarini, the firm’s London-based markets economist, said.

“Given that we no longer think that these will support the exchange rate, we have revised down our forecasts,” Ms Gambarini also said.

That’s a pretty steep fall and takes the Australian dollar back below the GFC low at 63 cents:

In the short term, watch the 69 cent lows – reached during the last nadir in late 2015 – as the crunch point for positions to move swiftly against the Aussie, which Capital Economics rightly points to as a risk proxy. With the US and European economies now at the end of their business cycle, the risk cycle has also peaked, and thus, the Aussie is going downtown.

Comments

  1. Need to get an e3 Visa and get the family over there earning usd.
    I could definitely live in northern nevada. Low tax. Ski and mountain bike. Low cost of housing. Not humid.

    • Been E3 for a year now. Wifey and I are loving the bonus increases via the peso. Living in Virginia has all the same but humid in summer. So it’s salmon fishing in Alaska, whooshka!

      • Fifth year on an E3… Said I’d move back after two years but it’s too good here (Boulder, CO – where you can mountain bike year round with no humidity).

        If the stars align, I’m hoping to snap up heavily discounted Aus real estate with USD buying 2:1 – doesn’t seem so crazy given the current trajectory of both the dollar and housing.

  2. And the NAB think it’ll be 79c next year. Muppets with no macro analysis except ”the USD is over-valued”

    My money is on Capital Economics being too bullish.

    As this housing bust really gets going, retail dies, construction shudders and goes all post coital, unemployment shoots up and the RBA cuts and then prints something in the low 50s mid 2020 looks about right. Heaven forbid Trump and China fall out, or Brexit collapses Italian banks…

    • If this happens, and the AUD falls, won’t this stoke inflation? Then the RBA will need to increase rates to curb it, which will raise the AUD?
      Do the RBA still have an inflation mandate, or is their job now only to keep house prices from falling?

      • C.M.BurnsMEMBER

        they are both good questions and have been debated here at length for years now. I think the jury is split on whether they will raise rates to fight a crashing dollar and subsequent imported inflation; or “look through”

        if the RBA follows the standard central bank playbook then you’d think they’ll raise to protect the currency and inflation but, our RBA have shown repeatedly to be corrupt in the pursuit of protecting this housing bubble, which they helped create.

      • If captain Phil has to eat that sandwich, I will gladly make it a poo toastie for him. He deserves it to be warmed up first.

      • My bet is that they will ‘look through’. They’ve backed in the lower rates to solve everything. I guess inflation is in their mandate but ‘look through’ will give them a wat out for a while. So they’ll ‘look though! Look through! Look through!’ “Strewth!!! LOOK AT THAT! Hoocoodanode!”
        Edit: I’m not going for cuts. I just don’t think they will increase until the inflation is well embedded and well out of control.

    • I agree, it just seems business as usual at 70/73c around
      But there will be a point over next 2 years that RBA will cut to zero and print to help the banks
      Until then is seems in a trading range
      Maybe 2 cuts this year with US say one increase and Aussie property 10+% lower this year
      I don’t think anyone has inc Damien at CS 50 basis point rate increase
      That’ll scare the gbeezus out everyone
      If we see 50 increase I think you can say 15% lower again from now in Mel and Syd in 2019
      I’m from Melb and I’m in Sydney this week and my Uber driver who was 30 year old Asian said he bought a $1M house 50km from the Syd CBD and has a $850k mortgage, he bought in 2016 and says his home was $1.1, his loan repayment int only is $3400 per month and said he wants to move to GC, the problem is they are too late now and he needs a snorkel
      It’s very sad state of affairs

  3. Shorting AUD was very profitable last year.
    Looks like 2019 will similarly deliver the goods.

      • No, I was selling the rallies in US equities and moving some back into AUD to buy bank shorts; picking up the profit from that year long downtrend in the AUD/USD.

        Even if someone just bought at .78-.81 range we had at various times in 2017/early 2018, they’ve made a decent return from that clear year long move down.

  4. Divide et impera

    If the RBA were to cut rates to meet international levels then every single reserve bank on earth will start eviscerating AUD from their reserves.

    AUD would plunge to 40 cents.

    People who think the RBA are monitoring house prices and domestic activity for their interest rate settings have no idea – literally none – as to what the RBA’s role and mandate is.

    Its absolutely NOT about housing, construction or maintaining “demand” and economic activity as it was back in the 1990’s when most people got their economic training wheels.

    Its about maintaining inflation – as it always has been – and maintaining trade balance. In other words inflation is FAR worse than unemployment – far worse.
    Also dropping the interest rate and AUD will not improve Australia’s trade balance with increased exports – they will stay the same – the only result with be a reduction in value for the same fixed amount of goods.

    People – seriously – get over this antiquated idea about interest rates – its from the 1990’s and is based around a DIVERSE manufacturing based economy – that no longer exists.

    How people are not aware of this is beyond me – its staggering.

    .

    • CaptainFeatherSwordsGhost-TheHaunting

      a rare day I agree with anyone on this commie blog. Congratulations Divide et impera.

    • Divide et impera (or others) would be interested to hear your take if the RBA followed other central banks down the QE road. Surely the supply/demand dynamics would put additional pressure on the AUD. In any case from my narrow perspective further falls in the AUD seem likely its just the magnitude that will vary.

      • Divide et impera

        Same issue.

        I have no question in my mind this will be the path they take rather than lowering rates. People really do not understand what has been holding up the dollar – everyone on here constantly in AMAZEMENT at the unflushable floater.

        We have been directly told multiple times but people simply ignore it and go back to their classical economic models of commodity demand etc.

        The dollar is being held up because of foreign reserve demand as an investment grade currency which has huge spreads over their domestics as PART OF their basket of investments and hedges.

        In other words – reserve banks, supers, 457’s, retirement funds etc are investing in it as it offers a no brainer on its return due to the spread.

        Lower those rates and there will be capital flight – it will be dropped like a hot potato – so it will not happen.

        Further there is no benefit to the domestic economy as it does not increase our competitiveness in manufactured exports MORE THAN it offsets our losses in static levels of commodity and secondary / tertiary exports like education.

        Melbourne University is not suddenly going to offer 1,000 new places because the currency went down – the same static number of places will now simply return less value. The same static amount of gas contract, iron ore shipments etc will all simply return less value.

        Yes – the cars, fridges and washing machines we manufacture and export will now be more competitive – THE LOLS ARE HURTING ME.

        Finally lowering the rates will simply destroy the savings of Australians and I have no doubt they will remove funds at that point- eviscerating the banks and forcing them into offshores. No gain. No improvement for economy AT ALL – only pain, pain pain.

        So the printing presses offer a real solution – easy cheap money into the economy, jobs, stimulus, stimulus etc – major works including infrastructure and government employment.

        This will be pushed way passed what is acceptable to foreign markets on the very premise of “INVERSE MORAL HAZARD” – you set the standards for UK, US, China without repercussions on trillions of QE – so we can do the same without repercussions.

        Will happen. Interest rate cuts will absolutely NOT HAPPEN – and would have happened 12 months ago if they were ever going to be considered.

    • re inflation, a mates dad’s pension increase was quoted at 0.8%. I’m not sure how that relates to the real inflation which is bogus. As for the dollar falling to 60c; I’ll believe it when I see it. For years I thought we’re over valued but the system is rigged IMO.

    • That is a very insightful overview, thank you for sharing your knowledge. Having spelt it out like that I do tend to agree with you about how it will unfold. My only question mark is around the RBA’s ability to achieve this without any policy errors… they seem to be well behind the curve at present (although they have stated that they’ve passed to baton to fiscal policy). I know they have inflation mandates but we are fast approaching outright deflation (imagine CPI if housing was included) so they cant sit on their hands too long in their game of brinkmanship.

      It is quite the dilemma trying to protect/grow wealth with the current set of investment options. I was about to pull the trigger on a basket of currencies to take advantage of a falling AUD but as you have pointed out we are most likely near lows due to the current global carry trade (with the exception of the US). Might have to just be content with my USD assets, AUD cash and no AU property exposure. Although I might add some Yen in there to eventually buy some Japanese shares.

      We live in very interesting times…