The CBA is also calling for a lower Aussie but it's their view on China which is most interesting

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The Commonwealth Bank’s chief currency and rates strategist Richard Grace and his team have become the latest to join the chorus of strategists and economist who see the Aussie dollar heading toward 60 cents in 2016.

In a note released this morning, Grace outlined a cocktail of negatives which would drive the Aussie dollar to 65 cents by the end of Q1 2016 with the risk “of a further fall to 0.6000 in 2016”.

The key drivers include:

  • China and the rest of the global economy are likely to remain weaker for longer. Asian currencies should fall further.
  • Weaker global demand and extra commodity supply has seen our commodity strategists lower their price forecasts.
  • Australia‚Äôs current account deficit has unexpectedly widened to 4.7% of GDP and Australia-US rate differentials are narrowing.

Given the recent raft of downgrades to Aussie dollar forecasts, none of this is fresh news on its own.

But it’s the outlook for China and Asia more generally which is worth highlighting. Grace said the CBA has pushed back its forecast for recovery in China. The bank has kept its 2015 forecast at 7% but lowered its 2016 forecast from 6.9% to 6.5%.

That’s still a relatively bullish outlook compared to what has become a consensus view that the game might be up for Chinese growth.

While it is easy to be bearish given recent uncertainty on China, Grace is focused more on the economic stimulus in the pipeline and the improvements he sees in the economy already occurring.

That’s not to say there aren’t headwinds. But Grace said the key headwinds facing the Chinese economy are likely to remain the same over the next 12 months:

    (i) decelerating growth in heavy industry (reflecting overcapacity),
    (ii) poor export growth (reflecting weak external demand and strong CNY exchange rate in trade weighted terms), and
    (iii) weak new housing construction (reflecting high inventories).

But he’s not in the hard landing camp.

“There are tentative signs of improvement in new housing sales and credit growth in recent months,” Grace said. “The number of fixed asset investment projects is also rebounding. In time, these positive changes will translate into more sustainable economic growth in China.”

That’s great news if he is right – for China, its population, Australian businesses, and markets.

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