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Australian dollar headed for hard times
Published on 26.09.2017 15:34

The Australian dollar is down below the US79c mark and under further pressure today following on from yesterday’s heavy losses on the back of falling commodity prices and according to some, the outlook for the currency is pretty grim.

The Aussie has lost over US2c in the previous 5 trading sessions which was exasperated by the sudden mini collapse of iron ore, Australia’s biggest commodity, which has fallen from $80 in mid-august to around $63 today and is now officially in bear territory.

An asset is considered to be in a bear market if it loses 20 percent of its value in quick succession from a recent high.

Last month’s figures out of China released to the market recently were lower than expected, which has contributed to the fall in iron ore as the country is Australia’s main customer for the commodity.

 “August activity and spending data suggested that the Chinese economy is starting to slow.” noted Caroline Bain, chief commodities economist at Capital Economics

“We expect the price of iron ore to fall further and to average just $55 a ton in the fourth quarter,” she added said.

Another factor which may put pressure on the Australian dollar in the medium term is the RBA’s inability to raise interest rates to keep up with the rest of the world which is currently tightening monetary policy.

 According to Westpac analyst Bill Evans, the Australian central bank will need to keep rates on hold for the next few years until 2020 in the current environment.

He noted the following factors will keep the RBA’s hands tied on the question of rates,

“The RBA is forecasting 2 percent underlying inflation in 2017 and 2018, bottom of target band, to be followed by 2.5 percent in 2019,” and yet in reality, underlying inflation is currently running at 1.8 percent and the upcoming revised weights are likely to reduce annual underlying inflation by 0.2-0.3 percent.”Mr Evans said.

“Given the global lessons on the structural wages outlook, it seems unlikely that wages in Australia where spare capacity is higher than in these other developed economies will lift significantly even in the medium term,” he added.


Andrew Masters

Analyst

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