Sometimes people in a crowded room will say something outrageous to get noticed. That’s probably the first thing most people would think when they read a call for the Aussie dollar to head back to 50 cents.
But Connor Grindlay, chief investment officer at Sydney based money manager Kaizen Global Investments, believes that because the Aussie dollar has a strong relationship with commodities and the commodity price crash “is not over”, the Aussie dollar could fall all the way to 50 cents.
In a research note, Grindlay said:
“The Australian economy is linked to the fortunes of commodity prices, and this flows through directly to the currency.”
That’s important because Grindlay believes that after rallying sharply for the best part of 10 years, commodities, as measured by the Thomson Reuters Equal Weighted Commodity Index, are in a bear market and have further to drop.
Grindlay highlights that the Aussie dollar through history has cycled with commodities and in the last big commodity bear market, “fell 60% against the US dollar”. Of course, the dollar also rallied sharply as commodity rocketed higher until the most recent peak, which coincided with the Aussie dollar above 1.10 against the US dollar.
Grindlay says he finds this pattern “remarkable” and draws the conclusion “that the Australian dollar could fall back to 50 cents (or lower) to the USD over a 10-15 year period and Australian investors should buy international assets to protect themselves against the fall”.
Which in some ways is the point of the note because global diversification as a hedge against a falling Aussie dollar is what Kaizen Global offers investors.
But that doesn’t make the research any less valid. If Grindlay is right and commodities are in a grand bear market, then the Aussie dollar could head well below 70 cents, as some US investment banks already forecast.
50 cents may sound a stretch at the moment. But that’s what people thought back in 1999 when Richard Franulovich, Westpac’s now New York-based currency strategist (and I) suggested that’s where it was headed in the years ahead.
So as remote as it might seem, history has taught forex traders to never say never.