Mining boom over, the only way is down for the Aussie dollar. House prices may follow too.
According to a report by a boutique US advisory firm, Variant Perception, the Australian dollar is predicted to fall due to our banks being over-reliant on external funding, a bursting housing bubble and a slowing Chinese economy.
The Australian dollar is often regarded as a proxy for commodity prices, given how dependent the country is on resources exports. As we’ve seen in recent times, commodity prices have fallen substantially from their highs, with iron ore and coal down at least 30% in the last six months or so.
Unusually, the Australian dollar has remained high, rather than follow commodity prices down. This most likely has more to do with a struggling US and Europe’s economic issues, with Australia seen as a relative ‘safe haven’ compared to the rest of the world.
As Australia’s terms of trade starts to decline, that will place even more pressure on the currency and the economy. With the Reserve Bank of Australia likely forced to cut interest rates, this would place even more downward pressure on the dollar.
The other issue is that 45% of Australia’s external debt is held within the banking sector, as Australians have borrowed, mostly to buy housing, pushing up property prices. The report suggests we are in a property bubble, and as the property market continues to correct, banks may have trouble funding themselves.
That’s not good news investors in the big four, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), and something we’ve been warning about for some time.
The good news is that a lower Australian dollar would be a welcome relief for our exporters, and Australian companies with significant overseas earnings. It would also be good for our tourism industry, as the lower dollar makes it cheap to holiday here.
As my colleague Bruce Jackson mentioned in a recent article, “Don’t panic, but don’t be complacent”.
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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.