The Bears Have It: The AUD Could Fall Below 70 Cents In 2014

There is a lot of bearishness in the market about the Aussie Dollar at the moment, with traders and hedge funds seemingly of the almost universal view that the Aussie dollar is going to trade lower in 2014.

RBA Governor Glenn Stevens believes 85 cents is about right but Bloomberg quoted currency forecasters calling the Aussie dollar down to 83 cents, 80 cents and even 75 cents.

The key theme seems to be that the Australian economy is weak – relative to US economy, at least, with the latter running at an annualised rate of 4.1% in Q3 2013 according to the US Bureau of Economic Analysis.

Global investors are also expecting a difficult transition from mining investment boom to more domestically generated growth, which might even necessitate further RBA easing.

So traders are selling.

“We think that Stevens has set the price at $US0.85 and it will naturally gravitate toward that [level] in the short term,” Melbourne-based commodity trading advisor Arthur Bengasino told Business Insider.

“Good bids have seemed to hold it up sub-89 and the days of up on an escalator and down on an elevator may be now the opposite and AUD remains on the slow path of devaluation.”

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The difficulty in all of this – the Governor’s $US0.85 mark and hedge fund managers’ lower valuation – is that the Aussie dollar has been seen as a growth proxy for years, and the global economy is entering 2014 looking strong.

Against this backdrop, a $US0.75 Aussie dollar shouldn’t be anyone’s base case for 2014 based on traditional drivers … Or should it?

As we highlighted in this morning’s chart of the day, a long-standing relationship between the Australian dollar and the performance of global mining shares in context of the wider market suggests that the Aussie could trade substantially lower in the months ahead.

Suggests a move below 70 cents

As strange as it may seem with the global economy healing and stock indices up, Australia and the “stuff” we make are just not sexy at the moment for global investors.

Bengasino told BI that the outlook is clouded by the multiple possibilities, and uncertainty around “Australian growth, china or a global double dip” will prompt more long-term investors to sell.

That, in turn, could lead to “genuine flow” of Aussie Dollar selling.

It’s not his base case scenario, but in an uncertain world, uncertainty itself could be a reason to sell.

Call it a return to the days before China’s boom took the Aussie Dollar to $US1.1080, or simply reflect that the last 12 months has felt, in market terms, very much like the lead-up to 2000.

Back then, during the dot-com boom, it was all about the new economy versus seemingly old-world economies like Australia. Sectors like mining just couldn’t compete for global capital.

Similarly, companies and technologies that bring us closer together and speed up our lives are now attracting huge amounts of money. Think Facebook, Yahoo, LinkedIn, Amazon, Snapchat and so on.

And given that there is a clear corollary between the past 12 months and the dot-com bubble, it’s worth noting that the Aussie dollar hit an all-time low of 0.4775 on April 19 2001.

Put simply, the Aussie dollar wasn’t a main focus for investors then, nor is it now.

Based on this relationship (and this one alone, which is not the way strategists would normally forecast), the Aussie dollar could trade below 70 cents unless mining and the “old” economy can pull back some headway from all things tech.

But hey, that’s just my two cents.

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