Investors and gold miners will be hoping that a bold prediction that the Australian dollar falls 15% to just US60c comes true – and fast.
The Capital Economics prediction is that the Australian dollar will fall to US60c this year and remain there until 2020 – its previous forecast was for US65c for 2019 and US70c for 2020.
The key to the lower forecast is that Capital Economics thinks the Reserve Bank of Australia will be forced to cut official interest rates from the current 1.5% to just 1% to support the ailing property market.
Iron ore and coal prices set to slide
Capital Economics is also bearish on the Australian dollar because it thinks commodity prices will slide on deepening trade woes in China – particularly Australia’s big volume iron ore and coal exports which make up around a third of our total exports.
Lower interest rates would make the Australian dollar less attractive for investors compared to other countries with higher rates, while lower commodity prices would cut Australia’s trade performance.
Winners and losers
A lower dollar brings with it many notable pluses and minuses.
It would be fantastic for shareholders in many of the large Australian companies that have a lot of offshore earnings, such as CSL (ASX: CSL), Amcor (ASX: AMC) and James Hardie (ASX: JHX), to name a few.
Gold would glitter
It would be fantastic news for Australia’s gold miners who continue to pay Australian costs but get many more Australian dollars per ounce of gold because gold is priced in US dollars.
It would also be a big benefit to Australia’s services exports of education and inbound tourism because we would become a much cheaper destination.
However, a lower dollar would be bad for Australians travelling overseas and would bump up the price of petrol and many imported goods and services significantly.
Taken together with Capital Economics’ prediction of a deepening housing slump, that would be very negative for the household sector and potentially listed retailers.
Just a prediction
It is also important to realise that the Capital Economics’ forecast is exactly that – a forecast.
Many other economists and analysts are much less bearish about the prospects for the Australian economy and the Australian dollar.
They see the rash of infrastructure spending by state and federal governments and continuing strong trade flows as supportive of Australian growth, with the possibility of a resurgent household sector relieving the RBA of the need to cut interest rates as the housing sector muddles through the downturn.
Anyway, whoever turns out to be right with their prediction for the direction of the Australian dollar, the currency was firming on Friday at US71c.
That firmer tone followed better than expected December jobs data which showed that 21,600 jobs were created over the month and the unemployment rate fell to 5%.