Today we will be providing a short-term and mid-term Aussie Dollar forecast. While we don’t want to sound like Chicken Little, it seems the outlook is increasingly bearish for the AUD as more economists come round to the increasing likelihood of interest rate cuts.
Leading analyst flags debt and interest rates cuts
As published in The Sydney Morning Herald, Michael Every, head of financial markets research at Rabobank in Hong Kong, has been quoted as saying the following today:
‘The RBA just sat there watching the housing bubble grow for the past couple of years…you’re in a doom loop. Now that the Federal Reserve is finally on hold, the RBA can finally talk about cutting again — and they will.’
From a start of 67% in the 1990s, the household debt-to-income ratio has flown to 189%.
Bloomberg has a handy chart showing what has happened to the Aussie Dollar since the ratio really took off around 2013:
Earlier, we flagged how the Federal Reserve probably should have considered interest rate hikes as far back as late 2016.
As for our own RBA, the script is far worse.
Post-GFC, they relentlessly cut rates, always trying to juice the engine.
Now we have a rapidly deflating housing bubble combined with some of the highest household debt to income ratios in the world — leading to the ‘doom loop’ characterisation.
Where will the Aussie dollar go from here?
The current short-term outlook is bearish, pointing towards a target of $0.69/$0.68 following a ‘flash crash’ we covered earlier.
In the mid-term however, the waters become a bit muddier.
One thing to consider is that China is seriously considering a massive tax-cut to stimulate its economy.
If this occurs/is announced in the coming weeks, this could cause a spike in the AUD.
Extending our analysis out a bit further to the mid-term, there are serious macro concerns for the currency.
Slowing global growth, the prospect of a recession, credit crunch etc., could all play a factor.
As a result, it appears unlikely that the currency will rise much beyond the upward support of $0.73 and could, in a cataclysmic scenario, potentially hit lows seen post-GFC.
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