The Aussie dollar has further to fall

The Australian dollar, or Aussie, has sunk to a six-year low around $0.73 against its US counterpart – and looks set to head even lower. The immediate cause is the slump in commodities: the prices of Australia’s two biggest raw materials exports, iron ore and coal, have respectively fallen by 70% from their 2011 peak and by 45% since 2013.

While some analysts believe the commodities market may not be too far from a bottom, “we think the market is underestimating the knock-on effects” on Australia’s economy, says Morgan Stanley.

Inflation-adjusted domestic income has taken “an unprecedented 8% hit” in the past few years, estimates the bank. The hit to national earnings is filtering through to confidence, business and consumer spending, and the labour market.

It’s also hard to see how the economy can compensate for the commodity-induced weakness. Non-mining investment has disappointed thanks to years of high exchange rates and worries over global growth. The high Aussie dollar is largely responsible for the demise of the Australian car industry, which became uncompetitive compared to imports.

Consumers kept piling on debt during the global crisis, which Australia escaped largely unscathed, so household debt is now worth 130% of GDP, one of the highest levels in the world. And the already bubbly housing market is unlikely to provide much additional momentum.

The upshot is that interest rates are set to fall further from their record low of 2%. With the US economy looking solid and interest rates there set to rise soon, the Aussie will become even less appealing compared to the greenback. Morgan Stanley reckons it could dwindle to $0.64 by the end of 2016.

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