Why the Aussie dollar won’t be rallying any time soon
Written by Carl Turner on June 29, 2015.
Last week I posted on the woes of the Australian dollar and how analysts are generally in agreement that the currency will remain weak well into 2016. This week I read with interest that after the board minutes from the Reserve Bank of Australia were published last Tuesday, Barclays issued a note recommending that speculators sell their Australian dollars.
The reasons for such a pessimistic outlook for the currency are threefold:
1. The AUD is over-valued
Experts suggest that the AUD is over-valued by as much as 10%. The Reserve Bank of Australia has acknowledged that further currency depreciation ‘seems both likely and necessary’ and looks likely to follow in the footsteps of the Reserve Bank of New Zealand in trying to push the exchange rate lower. The blame is laid at the door of falling commodity prices with decreased demand from China playing a major role.
2. Non-mining activity weakening
Last year the non-mining sector was showing positive signs for the Australian economy but now cracks are starting to show and the outlook for this sector is less optimistic.
3, Spare capacity
It is generally accepted that Australia’s stalling economic growth is in part due to spare capacity i.e. both capital and labour are not operating at their full potential and not maximising returns to capital. Currency movements are a means to shift capital from those economies with an excess which results in lower returns to capital to those with a scarcity which delivers higher returns. This is why minimising spare capacity will often drive the strengthening of a currency.
Predicted rate rises for the US coupled with a pessimistic outlook for Australia’s risk-adjusted relative returns means that Australia’s economy and assets look to be in for a rough ride for the foreseeable future.
While Barclays forecasters are recommending sell, sell, sell, there is no need for panic. The key to advice is stay make sure you have a diversified and balanced investment portfolio.