In the past two years, the Australian dollar, or Aussie, has often dipped below parity with its US counterpart before climbing back. But it now seems to be taking a “permanent step down”, says Neil Hume of the Financial Times. Worries over slowing growth in China, the key Asian consumer of Australia’s commodity exports, have intensified as the latest manufacturing index suggests the sector is shrinking. A slowdown is also evident in other Asian economies, notes Morgan Stanley. The commodity boom is unlikely to be revived now that China is trying to promote consumption at the expense of investment over the next few years.
The Australian economy has weakened and interest rates have fallen to just 2.75%, reducing the relative appeal of Australian assets. Further rate cuts could well follow. Moreover, “the shine has been taken off Australia’s comparatively strong fiscal position”, says Fxpro.com. Having promised a budget surplus a year ago, the government has just forecast a deficit for the current financial year, largely because the mining boom has faded.
There has been a surge of positive sentiment towards the US dollar in recent weeks as US data has been comparatively solid. Finally, the Aussie remains historically pricey. At 96 US cents, it is still far above its average of 75 cents since the early 1980s. Tim Toohey of Goldman Sachs expects the Aussie to hit 90 US cents within a year.