Imported goods would be temporarily more expensive if the Australian dollar falls below 50 cents based on decades of history.
The local currency once dipped below 48 cents in early 2001 as the US tech wreck worried investors – the lowest on record.
But it also fell sharply at the start of the pandemic in March 2020, in late 2008 during the global financial crisis, and after the Asian financial crisis of 1997.
David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealthpredicts that the local currency will fall to an all-time low of 40 cents within five years – down from the weaker than average 65.7 cents today.
The economist, who co-wrote The Great Crash of 2008 with Ross Garnaut, Australia’s former ambassador to China, bases his forecast on a rise in the US dollar during a tech boom as China’s economy slowed.
His prediction would sink the Australian dollar to depths never reached since its initial flotation in December 1983.
But he urged Australians not to worry about a rise in inflation.
“We’ve been through these very low Australian dollar periods before and it wasn’t particularly inflationary,” Llewellyn-Smith told Daily Mail Australia.
Imported goods would be briefly more expensive if the Australian dollar falls below 50 US cents based on history (stock image of Australian banknotes)
David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealth, predicts that the local currency will fall to an all-time low of 40 cents within five years – down from the weaker than average 65.7 cents today
Unlike previous Australian dollar crashes, there will be no revival in Chinese demand for iron ore to rescue the currency any time soon.
“Don’t get me wrong: I don’t see this happening overnight, by the way,” he said.
“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.”
While importers traditionally order goods in bulk, based on where the currency is located, Australian dollar lows have also traditionally coincided with economic weakness.
As a result, there was no strong domestic demand accompanied by higher consumer prices.
“Import prices don’t always go up because sometimes what happens is the importer doesn’t have the pricing power to raise the price so they just absorb it into their margins,” he said.
Technical wreck of 2001
The Australian dollar’s all-time low was reached in April 2001 when it fell to $47.78 after the dot-com bubble burst.
In that period, inflation rose to an 11-year high of 6.1 percent, well above the Reserve Bank’s target of 2 to 3 percent.
The consumer price index was then comparable to that of today.
But inflation then halved to an annual rate of 2.5 percent in the September quarter of 2001, even though the Australian dollar had remained weak, falling to 48.65 cents from 52 cents a fortnight earlier.
The September 11 terrorist attacks in New York and Washington DC at the time also reduced the risk appetite of the financial markets.
The Australian dollar often struggles in times of weak global growth, meaning less international demand for crude oil.
Cheaper gasoline and transport costs mean that consumer prices have traditionally not remained high, even when the currency has been particularly weak.
His prediction would sink the Australian dollar to depths never seen since it went public in December 1983. But Australians are urged not to worry about an inflation spike (pictured is a shopper in Sydney’s eastern suburbs)
Covid pandemic of 2020
At the onset of the Covid pandemic in March 2020, the Australian dollar fell to 55.71 cents from 69 cents at the end of January, but quickly recovered.
That also coincided with national lockdowns, which saw the Australian stock market lose a third of its value in just five weeks, before rallying too much again thanks to government stimulus.
Inflation had already remained below 2 percent since the end of 2018 and in the June quarter of 2020 Australia experienced deflation for the first time since 1998.
Global financial crisis of 2008
During the 2008 GFC, the Australian dollar crashed from a 25-year high of 98.49 cents in July of that year to 60.12 US cents at the end of October.
Inflation had risen to 5 percent in the September quarter of that year, but had halved to 2.4 percent by early 2009 as the Australian dollar recovered to US$70, coinciding with improving Chinese demand for iron ore.
This time Mr Llewellyn-Smith said there will be no uptick in Chinese demand for Australian iron ore, the raw material used to make steel, following the overbuilding of haunted flat towers.
“Any time China’s growth is at stake, the Australian dollar will fall,” he said.
“Really, the only long-term way out for China is for their currency to fall and the fall in the Australian dollar is very attached to the yuan.”
The Australian dollar would be even weaker than the euro, with the European Union also being a major trading partner with China.
“I would expect the euro to be relatively weak as well – not as weak as the Aussie dollar,” he said.
That means those hoping to travel abroad will get a better deal to travel to Europe than to the United States.
“It’s going to be a lot more expensive to travel to the US, but there will be other places that are going to be a lot more like today,” Llewellyn-Smith said.
“I think Europe might be okay.”
At the onset of the Covid pandemic in March 2020, the Australian dollar fell to 55.71 cents from 69 cents at the end of January, but quickly recovered (pictured is Sydney airport in that month)
The gap between Australian and US interest rates is another factor that traditionally determines currencies.
The Reserve Bank of Australia’s 11-year high cash rate of 4.1 percent is still much lower than the U.S. Federal Reserve’s equivalent federal funds rate of 5.25 to 5.5 percent, now at its highest in 22 years old.
Mr Llewellyn-Smith predicts US interest rates are likely to remain high as an explosion of artificial intelligence boosted productivity, which would in turn keep the dollar at a high level.
He compared it to the late 1990s, when the expansion of the Internet boosted the US dollar.
“You end up with US growth outperforming everywhere — they have higher interest rates than everywhere else, so their dollar is outperforming everywhere,” he said.
It’s a repeat of the 1990s. In the next cycle is the artificial intelligence boom: you have post-commodity deflation coming out of Asia and in the US you have the rise and rise of the tech boom.
“That’s a productivity explosion coming in the US that replicates the 1990s – that was a very strong period for the US dollar.”
1997 Asian financial crisis
History repeats itself: the Australian dollar plummeted in 1997 during the Asian financial crisis, from 79.44 cents at the start of the year to 57 cents in September 1998.
In any case, Australian inflation was only 1.4 percent, after a period of deflation in late 1997 and early 1998.
Weakness in Asia and economic strength in the United States are expected to resurface, but with more dramatic consequences for the Australian dollar over the next five years.
“It’s definitely a long-term structural thing — not overnight or even a few years,” he said.
The days of parity with the US dollar are also a distant memory with India, now the world’s most populous nation, unlikely to buy Australian iron ore and coal to the same extent as China.
“Not unless there’s another China. India is not China. It’s not centralized, it can’t trigger a centralized urbanization boom.”
The Australian dollar was par with the dollar during the fixed exchange rate era, from the late 1960s to the early 1980s, and again occasionally from November 2010 to May 2013, during the resumption of the post-GFC China-led mining boom.