ANZ: Australian dollar headed to 0.65 cents

Via ANZ:

The Australian dollar’s recent leg down has pushed it below USD0.70 – that is, below the trough we forecast for this cycle. The global outlook has deteriorated sufficiently that it no longer provides a plausible cushion to the inevitable reduction in domestic rates. As such, we have lowered the trough in our forecast to USD0.65.

Before year end they say. I still agree its lower before its higher.

Comments

  1. If the Gods have a dark sense of humour (and that seems to be the way they roll) they will wait until the RBA responds to the house price pumpers with a series of rate cuts and then unleash a terms of trade / trade volume shock that sends the AUD plummeting and the cost of offshore capital spiralling upwards.

    And then from the clouds in the voice of Chuck Heston.

    “Who is a lucky country now?”

    • TL;DR: RBA cuts depend on the AUD. Too weak and cuts are off the table. Relatively strong and cuts get a green light. I think that if the AUD busts current support and falls quickly down to GFC support (~0.65) then the RBA holds.

      Sounds like you might be one of the few people prepared to back me up in saying that rate cuts are NOT a sure thing in the short term, as has been the case for the last 3 years. (The only correct call has been “unchanged” during this time). Long term is a different story because we’re talking post Australian Financial Crisis (AFC); a different phase entirely (ZIRP & QE).

      Higher rates detonate Main St (specufestors up to their back teeth in debt).
      Lower rates detonate Wall St (Megabank exposed to the AUD via foreign borrowing).

      Hence, the RBA has been stuck between a rock and a hard place for the last three years, holding rates steady and hoping for the best (Megabank refinances, the Australian economy miraculously provides new investment opportunities, or the global economy moves down into phase with Australia’s).

      For a while there, the global economy was strengthening as Australia went into recession, creating a nightmare for the RBA as it would be forced to raise rates into a recession. It almost happened. Then we got Powell hitting pause on quantitative tightening, Trump going hard for trade wars with China, Bolton killing the North Korea deal & gunning for war with Iran, and the ongoing Brexit mess. The world economy hit trouble and the RBA could breathe a sigh of relief as the world headed into phase with Australia.

      AUD valuation is front and centre here. I think that Lowe’s “leak” of a coming interest rate cut was intended as a deliberate probe of the forex markets, which he knew would subsequently move to price in a cut. If the AUD maintains relative strength then the RBA gets a green light to cut. If the AUD breaks support, then the RBA’s going to have to hold.

      Lowe has to be cautious because next major support is at the GFC lows (~65). That’s only a thin layer of protection for a cut or two because beyond that it’s clear air all the way down to the 9/11 lows (~50). If the AUD heads down to 9/11 support in a hurry, then Megabank detonates and the AFC is on like Donkey Kong.

      I have zero sympathy for the RBA here as it demonstrated utter incompetence in its dovishness post 2011. For no good reason it pumped more air into the housing bubble and refused to raise rates when the stupidity became too obvious for anyone to ignore. The RBA created this mess for itself and the rest of us; fire them all.

    • The Traveling Wilbur

      I thought that was: “From my cold dead hand.”

      Or maybe I’m mixing that up with Australian Seniors voters and franking credits.

  2. Mark Lathams Brain

    House prices to stablise before rising again through 2019
    AUD to .65
    ALP victory

    Yeah – house prices are going to crash over 60% and the AUD is going below .50

    Immigrants will leave, AU will lose its ratings, everyone will wonder why and how.

    I’ll put it to you this way – if China was to stop buying Iron ore for one month – our economy would crash – 4 weeks.

    Just looked at a house block today 10kms from the CBD 500m2 – bulldoze job, nothing special suburb, high crime, $1.6 million

    That is about the average for any house on a block within that entire area – average weekly earnings for that area – $80k

    In order to afford that area TWO people need to be earning over $200k – according the ABS that is in the top 4% of wage earners in Australia.

    There are no house blocks within 10kms of Melbourne CBD for much less than $1 million – this means almost 100% of houses require incomes over $200k – while only 4% of incomes are in fact $200k plus

    That is the equation. That is the simple basic maths.

    Even heading out to Tarneit a block of land is $360k and a house is $200-$300k requiring an income of $180k to service that debt.

    The only way the entire market was able to push prices so high was flat out fraud. Even if APRA lowers its standards the class action law suit wont. If the class action law suit wins – then the collapsed economy through total consumer destruction will destroy the banks.

    There is simply no way around this – none. Its a 100% fait accompli – done, dusted.

    • $200-300k to build a house? At least $3k a sqm to get something dead basic and most new houses these days are > 150 sqm. So let’s call it $400k to build and $350K for the section.
      $750k with 10% deposit is $675k plus LMI of $15k on a Tarneit income having to pay back circa $45k a year over 25 years. After tax take home for two wage earners grossing $100k (e.g. 65k + 35k) is $82k.

      Looks like fun being in severe debt stress for two decades

    • I do like the cut of your jib (though I don’t discount you could just be reusa mark 2).

      I came across the term “the Baumol effect” last week and I think it applies to much of Australian real estate. Yes, as John Hempton said, the huge prices paid for premier real estate can be justified by the top 5% or so of people being very wealthy. But it makes no sense that the bulk of properties are priced based on those premium properties and not on what the 95% of people can actually afford to pay.

      I had a discussion with an optimist about Canberra real estate recently. They argued that Canberra nose-bleed real estate prices are fully justified because public servants are well paid. I pointed out that only about 40% of Canberra workers are public servants so how does that justify basic houses about an hour away from the city in peak hour traffic regularly selling for over $600k. The response was well the 40% of high paid public servants own most of the housing (didn’t even attempt to explain how Canberra’s rental market is the most expensive in Australia though).

      • Nice one.

        Tell him Canberra public servants were also well paid 20 years ago. So why were prices so much lower (relative to incomes) back then?

    • proofreadersMEMBER

      “I’ll put it to you this way – if China was to stop buying Iron ore for one month – our economy would crash – 4 weeks.”

      And off memory, we didn’t bother to reserve any gas from the Gladstone export projects for domestic consumption and we don’t have any oil refineries any more and only have something like 3 weeks of petrol supplies on hand at any time.

      How good is Straya?