In the early hours of this morning, the Australian dollar hit an 11-month low, dropping to 97.97 US cents before it rebounded, slightly.
That’s big news for a stubborn currency that for so long, would just not drop.
But it looks like it could have even further to fall, with revised Goldman Sachs figures out this morning predicting it could go as low as 90 cents within a year.
It’s no knee-jerk. Goldman Sachs knows the dollar’s dropped below parity before, but this time the forces driving the current adjustment seem to be “more durable in nature.”
The factors GS says are involved are: big miners are not spending as much, there’s a slew of poor economic data coming in, the federal Budget deficit persists and the Reserve Bank’s cut the cash rate to a record low.
“As such, we have changed our forecasts for the A$/US$ to 0.97, 0.96 and 0.90 on a 3, 6 and 12 month view,” Goldman Sachs economists said in their note.
Investors have been reluctant to express a negative view of the Australian dollar, but Goldman Sachs has laid out several reasons why, finally, it will “succumb to gravity.”
And they are:
Commodity prices — especially iron ore — are going to get worse.
Resource companies aren’t spending as much money, which could mean overseas companies are finished investing a ton of money here.
Australia’s been a “poster child” in a search for yield, which has seen overseas investors pour into our equity and fixed income markets. Goldman Sachs says a case can be made that this is drawing to a close.
Particularly, if our massive superannuation sector decides that the dollar’s adjustment is permanent, they could increase their allocation to equity markets offshore, which GS says could drive the dollar down further.
If the dollar actually goes to 90 cents, Goldman Sachs says the RBA will definitely be done easing.
“Indeed, we see the A$ adjustment as quite bullish for the non-mining economy,” it said in its note.
Well, that’s one prediction. In its Federal Budget summary, The Commonwealth Bank said the dip below parity is only temporary. It’s 12-month target is $1.03, well above the Vampire Squid’s.
Central banks buying our dollar, according to CBA, will continue to prop up the AUD’s strength.