As he has been for the entirety of this year, Joseph Capurso, senior currency strategist at the CBA, remains an Aussie dollar bear.
Despite the recent bounce in the currency, something that saw it come within two days of setting its longest stretch of gains since floating in 1983, Capurso isn’t perturbed.
No, the short covering rally sparked by the US Federal Reserve’s decision to keep interest rates on hold at its September policy meeting has now largely played out, in his view. In a research note released late this afternoon, he outlines six separate reasons why he believes there is more downside to come for the once high-flying Aussie dollar, all of which are listed below.
- Low commodity prices
- Weak global growth
- Weak Asian currencies
- Declining global currency reserves
- Rising risk of an emerging market crisis
- Large and growing current account deficits
Like financial markets generally, all are interrelated and, in Capurso’s view, will likely act in unison to place renewed pressure on the Aussie in the period ahead.
Increased commodity supply coupled with slower global growth, particularly from the world’s largest commodity consumer, China, may keep commodity prices under pressure which, in turn, could place pressure on Australia’s current account deficit, already running at an above 4.7% of GDP.
The economic slowdown in China, along with the prospect of higher interest rates in the US, may see Asian currencies come under renewed pressure, something that as the chart below shows could spell trouble for the Aussie given its historic relationship to Asian currencies, excluding the Japanese yen and the fact that many see it as merely a proxy for economic activity across the broader Asian region.
Weakness in Asian currencies could also turn into a full blown Asian currency crisis – a small but growing risk in Capurso’s opinion – which, given the relationship between the it and other Asian currencies, could heap further pressure on the Aussie.
Throw in the potential for global FX reserve managers to start reducing their exposure to the Australian dollar, something that may ensue given they have been drawing down other currency reserves of late to counter private capital outflows, and the ingredients are in place to see the Aussie remain under the pump.
Like many forecasts, Capurso believes there are two prominent risks to his view – that the US Federal Reserve pushes out the timing for its first rate hike beyond the first quarter of 2016 and, secondly, that the prospect for lower interest rates in Australia – something that markets continue to price in – is removed before early 2016.
In early Asian trade on Wednesday, the AUD/USD currently buys .7260, some 5.3%, or 3.7 cents, above this years low of .6893 struck on September 7.