The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index may yet surprise on the upside in 2019 but at least one economist thinks there's only one-way for the Australian dollar to go this year – and that's down.
The Aussie battler is fighting a losing battle and is forecast to plunge 15% to around US60 cents, according to the latest update from Capital Economics that's reported in the Australian Financial Review.
Don't expect a recovery either as our dollar is expected to hover around that level in 2020 as well!
Why the Aussie could be headed lower
The new forecast is more bearish than the firm's previous prediction that tipped the Aussie to average US65 cents in 2019 and US70 cents in 2020.
What's driving souring in sentiment towards our currency is the interest rate. Capital Economics downgraded its rate forecast for Australia last week as it expects the Reserve Bank of Australia (RBA) to cut the official rate to 1% from its current record low of 1.5% to stem the deepening housing price slump.
There has been a growing chorus of economists that are tipping a rate cut by the RBA this year. It wasn't that long ago that everyone thought that the next move by our reserve bank was to lift rates along that with the US Federal Reserve.
Such a significant fall in the Aussie will have a big impact on your ASX share portfolio, but the good news is that a weakening local dollar should be supportive of the ASX 200 index – all things being equal.
More good than bad?
Most of our large cap stocks generate a good chunk of their income in US dollars and would get an earnings boost when they translate earnings back into Australian dollars.
Global logistics group Bramble Limited (ASX: BXB), building materials supplier James Hardie Industries plc (ASX: JHX) and healthcare stocks like CSL Limited (ASX: CSL) are but a few examples.
The thing is, I think we need to see a lower Aussie if we want to see the ASX 200 index gain ground this year.
This might be particularly so for our miners, such as BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), if Capital Economics' commodity forecasts also come to pass.
The firm is predicting iron ore to fall to US$55 a tonne this year and US$50 a tonne in 2020. The iron ore price is currently fetching around US$74.50 a tonne.
The drop in the commodity price would put a dent in the earnings of BHP and Rio Tinto, but some of that will be offset by the falling Australian dollar.
Rio Tinto will probably fare better though as its flagship iron ore project in based here. This means the weakening exchange rate will also serve to lower its cost base at its Pilbara mine.
I'll be staying overweight on these offshore earners in 2019!
