The Upside of a Dive to 85 for the Australian Dollar

Fidelity analyst Heather Hagerty says a lower Australian dollar is beneficial but the speed of the currency’s decline ‘is the real problem’. Translation: the lower dollar will be good for mining businesses, industrial stocks, and exporters. But if the currency falls too far too fast, it could accelerate the flight of foreign capital from the country.

Goldman Sachs has cut its growth and currency forecasts for Australia, according to today’s Wall Street Journal. Goldman reckons the Australian dollar will trade at 85 cents in the next twelve months. It further reckons Australia has one chance in five of falling into recession as a result of lower export prices and a weaker dollar.

These guys. Really. A few months ago they were calling for a floor of 90 cents in the Aussie dollar. And with any forecast, you never know how much a given company is simply talking its book, or saying one thing while doing another. It’s no use making your currency forecasts after the unit has lost nearly ten per cent in the last two months.

Still, Australia hasn’t had a recession in 22 years. If there was ever a time for one, with falling export prices, the end of the big pipeline of resource investment, and a weaker dollar, now is that time. Stay tuned for more on this.

In the meantime, not everyone in our Albert Park offices is as gloomy as your editor. Diggers and Drillers editor Alex Cowie views the falling dollar like rain drops on a parched desert. Alex is counting on the weaker dollar to take some cost pressures off the beleaguered mining sector. He says the Metals and Mining Index on the ASX has done relatively better than financials over the last two months. A dive to 85 for the Aussie dollar could be the catalyst for the punters coming back in.

Even the fatally flawed US dollar is piling pressure on the Aussie. Ratings agency Standard and Poor’s revised its near-term outlook on US government debt from ‘negative’ to ‘stable’.  S&P was the only one of the big three ratings agencies to cut the US credit rating from AAA to AA+ in August of 2011. Its latest action should cheer the dollar bulls.

But the dollar bulls are idiots. If anyone thinks the long-term US fiscal position is improving, he’s either a paid agent of the state or a first class moron. And you can put that in your big, menacing, know-it-all PRISM database and smoke it, US National Security Agency. Failed states grasp for power and tomorrow your editor will show you why America’s domestic spying scandal is both a travesty for civil liberties and the sign of an impending revolution.

Dan Denning
for Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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