Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital
While some have expressed surprise at the recent resilience in the value of the Australian dollar around the $US0.69-0.70 level despite weak Australian growth and Reserve Bank rate cuts, from a big picture sense it has already fallen a long way. It’s down 37% from a multi-decade high of $US1.10 in 2011 and it’s down 15% from a high in January last year of $US0.81. So, having met our long-held expectation for a fall to around or just below $US0.70 and given its recent resilience now is an appropriate time to take a look at its outlook.
The key points are as follows:
The Australian dollar likely faces more downside as Australian growth is weaker than US growth and the RBA is likely to cut more than the Fed. However, downside may be limited to around $US0.65 given that the $A has already had a large fall, short positions in the $A are large, the iron ore price remains high (for now) and the Fed is also heading towards rate cuts.
Given the downside risks for the $A and that being short the $A is a good hedge against threats to the global outlook it still makes sense for Australian investors to maintain a decent exposure to foreign currency via un-hedged global investments.