An investment strategist in the pension industry predicts that the Australian dollar will fall to a record low of US 40 cents within five years – with significant implications for the economy.
David Llewellyn-Smith, de chief strategist at MB Super and Nucleus Wealthexpect the AUD to fall to levels not seen since it was floated nearly four decades ago as Australian interest rates are still so much lower than those in the US.
Mr Llewellyn-Smith also said weaker Chinese economic growth could weigh on the Australian dollar if demand for iron ore – the raw material used to make steel – plummets.
Meanwhile, he predicts the US economy could see a US-led artificial intelligence boom, adding to the Australian dollar’s woes.
If the Aussie currency fell that low, overseas holidays, particularly to the US, would become more expensive as the dollar rose, the financial expert predicted.
Surprisingly, however, the price of imported goods for Australians may not be as high – with strong immigration in Australia suppressing wages and leading to lower inflation.
An investment strategist in the pension sector predicts the Australian dollar will fall to a record low of US 40 cents within five years (photo is a stock image)
“Don’t get me wrong: I don’t see this happening overnight, by the way,” he told Daily Mail Australia.
“This is the next five to ten years. This is a long-term forecast.
“I think we’re doing a good job with this process.”
The Australian dollar’s current level of 66 cents is already weaker than January’s 72 cents level.
A drop to 40 cents would sink the Australian dollar below its record low of 48.65 cents in September 2001, after terrorist attacks in New York and Washington DC added to the malaise of the dot.com crash.
Mr Llewellyn-Smith, who is also an economist, argued that the Australian dollar had to fall further because the Reserve Bank’s 11-year high cash rate of 4.1 per cent was still much lower than the equivalent federal funds rate of the US Federal Reserve from 5.25 to 5.5. percent, which is the highest point in 22 years.
“The US economy looks pretty strong — it may be in recession, but what we can see coming in the next cycle is the explosion of artificial intelligence,” he said.
Such an American-led AI boom has been compared to the beginning of the Internet’s expansion in the mid-1990s, which led to a stronger US dollar.
“You end up with US growth outperforming everywhere, they have higher interest rates than everywhere else, so their dollar is outperforming everywhere,” Llewellyn-Smith said.
“It’s a repeat of the nineties.”
China’s growth at stake, then Australia’s to fall
In Australia, the 30-day interbank futures market is now betting that the Reserve Bank hikes are over, and the Commonwealth Bank, Westpac and ANZ are all in agreement.
This is expected to happen as an economic slowdown in China lowers demand for Australian iron ore, which in turn weakens the Australian dollar.
A weakening of Australia’s terms of trade – the ratio of prices received for exports to imports – has been compared to the late 1980s, when the rapid growth of the Japanese economy leveled off.
In 2023, it will be the phasing out of China’s glut of apartment buildings, meaning less demand for steel and Australia’s biggest export, iron ore.
“China is now at the same pivot point as Japan was in 1989,” he said. The point is that China is so much bigger than Japan ever was.
“They’ve overbuilt on a scale that not only rivals, but even surpasses Japan, and they have a very, very tangled and volatile debt bubble underlying their real estate market that is unwinding.”
A collapse in demand for iron ore and metallurgical coal would mean a major drop in the Australian dollar.
“Any time China’s growth is at stake, the Australian dollar will fall,” he said.
“It has dramatic effects on the terms of trade and TOT, along with interest rate differentials, which are the two pillars of dollar value.”
David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealth, expects the AUD to fall to levels not seen since it was floated nearly four decades ago as Australian interest rates are still so much lower than those in the US .
Mr Llewellyn-Smith said a weaker Australian dollar is unlikely to cause an inflation problem in years to come as high immigration would stifle wage growth (pictured is a construction worker from Sydney)
China’s economic growth of 6.3 percent a year, in the June quarter, is comparable to the extended lockdown of 2022.
Mr Llewellyn-Smith said a weaker Australian dollar is unlikely to cause an inflationary problem in years to come as high immigration would dampen wage growth.
“We have a wild, massive wave of immigration that is also very deflationary for wages,” he said.
“We’ve been through these very low Australian dollar periods before and it wasn’t particularly inflationary – import prices don’t always go up because sometimes the importer doesn’t have the pricing power to raise the price.”
In the September quarter of 2001, inflation fell from 6.1 percent to 2.5 percent, even though the Australian dollar had fallen below 50 cents just as immigration was booming.
As the US boomed, a slowdown in China was expected to weaken the currencies of economies more closely linked to China, such as Australia, the European Union and large parts of Asia.
This means that a holiday to New York would be more expensive, but not necessarily to Paris or Phnom Penh.
“I would expect this denouement of China’s growth story to hit all emerging markets as well, causing all of their currencies to fall as well,” said Mr. Llewellyn-Smith.
If the Aussie currency fell this low, overseas vacations, particularly to the US, would get more expensive as the dollar rose, the financial expert predicted (pictured is a New York drone light show outlining the Statue of Liberty)
This is expected to happen as an economic slowdown in China lowers demand for Australian iron ore, which in turn weakens the Australian dollar (pictured are Evergrande apartment towers in Beijing)
‘Furthermore, I expect that Europe will deflate considerably because it is very dependent on Chinese growth.
“It’s going to be much more expensive to travel to the US or anywhere that’s linked to the US, but there will be other places where it’s going to be a lot more like today and I think maybe Europe will be fine.”
The Australian dollar reached parity with the US currency in 2010 as Chinese demand for iron ore continued after the global financial crisis.
But Mr Llewellyn-Smith said it is unlikely to happen again because India, now the world’s most populous nation, is not centrally planned like China.