27
Sep

Is the Aussie dollar finally ready to fall?

Aussie Dollar ParityThe Australian dollar may fall below the parity level with the US dollar in the coming months.  There are a number of contributing  issues.

The Chinese economy has been slowing from a high base for more than a year bringing some sobriety to the local two speed economy.  The resources sector has peaked and is now in decline after recent sharp declines in iron ore and coal prices. Lower demand for resource at a lower price suggests less demand for the Australian dollar.

Interest rates are likely to be lowered again by the Reserve Bank of Australia before year end. Despite the enthusiasm of Wayne Swan after the latest strong GDP numbers, more than 90% of the GDP result was delivered by the waning resources sector. The broader economy is struggling and lacks confidence to hire staff, invest and take on risk. Lower rates will ease demand for the dollar.

The government  is unprepared for a slump in tax revenue. The delivery of the infamous budget surplus in 2013 is highly unlikely as it relies too heavily on the resources sector. MRRT tax collections will be minimal. National debt has now built to above $200 billion in only four short years. An election next year will generate more rash promises from both sides. Australia’s industrial relations system, terms of trade and budget outlook are all under question. The Bureau of Resources and Energy lowered resource export revenue forecasts after the September quarter by another 10% having already lowered that number only weeks ago. Australia is looking less of a safe haven to investors. Capital flows are slowing;  pressure is building on the dollar.

Offshore investors have made good gains in local equities this year, particularly in banks and property trusts, that have been topped up with a handy currency gain. The temptation to bag the profits from a slowing economy are growing, particularly as the US economy shows signs of stabilising. This means dollar selling.

While Australia is one of only a dozen countries that are AAA rated by all the major rating agencies, our economy has attracted international investment in times of uncertainty. Pressures are building however and these flows could easily shift away from Australia to Europe, USA or Asian countries.

A lower dollar is good for the local economy. Australia’s manufacturing exporters would be more competitive, local business with offshore operations will benefit and the tourism dollar is more likely to be spent at home. Resource projects will finally become cheaper for foreign investors.

Businesses that benefit include those in healthcare, property, export, tourism, banking and resources. More importantly, the pressure will ease on the thousands of small businesses that play such an important role in our economy.