If you are planning an overseas holiday next year or looking to make an expensive purchase in another currency, you may want to sell your Australian dollars soon. It looks set to drop more than 18% against the US dollar by the end of next year.
That’s the bearish forecast offered by Alan Ruskin and George Saravelos, macro strategists at Deutsche Bank, who suggest a number of factors, none less than the prospect of further rate cuts from the Reserve Bank of Australia, will push the Aussie down to just 60 cents by they end of 2017.
The pair believe that recent strength in the Aussie has seen it overshoot fair value based on Deutsche’s modelling, leaving it “vulnerable” to correction.
The RBA’s attempt to move inflation back to target could see the policy rate fall to 1.25% on a one year horizon. The easing cycle could be even faster if downside risks to the labour market materialized later in the year. One trigger of slowing activity could come with a possible Labour win in the July elections. The prospect of negative gearing reforms would likely dampen house price inflation and reduce wealth effects on consumption.
In any case, the narrowing rate spread against the US will put pressure on bond inflows to Australia, on which the economy depends to finance its large and persistent current account deficit. Moreover, Australia continues to face external headwinds, most notably China’s deteriorating growth prospects for the second half of the year.
We expect renewed commodity price weakness in the near term, while continuing capital outflow pressures also make for devaluation risks later in the year.
Along with these factors, Ruskin and Saravelos believe that longer term “valuation remains an important bearish driver”, describing the Aussie as the “most overvalued currency in the world” at its current level of .7320.
If the pair’s forecast comes to fruition, it will see the AUD/USD trading back at lows last seen at the height of the global financial crisis.
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