An interesting article by Ryan Newman appeared on sharemarket advice website The Motley Fool Australia on June 11, headed, “Will the Australian dollar really drop to US 40 cents?”
Newman points out the Australian dollar has been on a roller-coaster ride this year, down at 68.28 in January and almost cresting the 80-cent mark in April. But a drop to 40 cents? Is this not wild speculation?
Newman lists three things he says the dollar is dependent on:
- The Australian economy: things such as employment, inflation or housing data, as well as business and consumer confidence can indicate where the economy is headed, and how much growth to expect.
- Commodity prices: our growth also depends on commodity prices, given the amount of tax revenue that comes from the miners. A falling iron ore price is seen as particularly bad for the economy.
- Interest rates: investors around the world seek the highest returns, and will put their money where they can earn the highest returns. Higher US interest rates would attract investors back to the United States, but the US Federal Reserve has been slow to act in lifting rates. At the same time, the Reserve Bank of Australia is hesitant to cut interest rates, keeping many investors attracted to the Australian currency.
These are standard statements that apply to almost all economies, not that all nations have commodities they can tear from the earth.
Newman says it’s impossible to tell which direction the dollar will travel but quotes Vimal Gor, head of income and fixed interest at BT Investment Management. According to Newman, Gor believes it’s only a matter of time before foreign investors realise how overvalued the Australian dollar is.
Gor also believes the Reserve Bank of Australia will be forced to cut interest rates to 1 per cent or lower. On this basis, Gor estimates the dollar will drop to 40 cents, or close to it. Newman is not convinced, but does see it around the 60-cent mark.
Should the dollar drop to 60 or below this would be an ideal opportunity to restore the US market to its former glory.
This should be an exhilarating time for Aaron Ridgway, Wine Australia’s new head of market, Americas. He starts his job on July 18. Angela Slade will remain to the end of June. If Ridgway can continue the good work Slade has put in motion, combined with a drop in the exchange rate, the American market will be on fire within a couple of years. Do not turn your entire focus to China; keep an eye on the US. Then again, if Mr Trump becomes Mr President, only your god or gods will know what will happen.