Australian dollar faces bleak outlook as markets cop a beating


The Australian dollar has seen better days.

The AUD is currently buying US 67.9 cents and is in a weakened state off the back of a seemingly unending trade war between the nation’s two biggest superpowers.

The Reserve Bank’s back-to-back cuts to national interest rates hasn’t helped, either, with more cuts forecasted for the future.

And according to some of Australia’s top economists, the outlook is bleak – but a lower Aussie dollar doesn’t necessarily mean it’s all bad news.

The Aussie dollar will keep falling

“There is the potential for the currency to weaken a little bit further,” CommSec chief economist Craig James told Yahoo Finance.

Echoing James’ sentiments, AMP Capital chief economist Shane Oliver said the Australian dollar was on track to meet expectations of falling to 65 cents by the end of the year, and then some.

“If the trade war continues to escalate then it may fall faster, it may fall beyond that,” Oliver told Yahoo Finance.

“But ultimately, we still see more downside – it’s just a question of how that unfolds.”

ASX and Wall Street stock markets have plummeted amid a tumultuous trade war between the US and China that stepped up a notch overnight.

Within an hour of open on Tuesday 6 August, the local bourse had fallen by roughly 2.5 per cent, and is still struggling to recover from its early losses.

What does a falling dollar mean for Australians?

There are two sides to this story. A lower Aussie dollar won’t be well-received by consumers, and exporting businesses will feel the pinch.

For local businesses, however, a lower Australian dollar is actually good news.

Online shopping and travelling will become more expensive

The Australian dollar has been falling for eight years – so the fact that it’s going to fall further will largely go unnoticed by Australian consumers, according to Oliver.

However, for those who shop online often or have international travel plans coming up, a low Aussie dollar that has even further to drop isn’t going to come as good news.

Globetrotting Australians will bare the brunt of a lower Aussie dollar more than others, Oliver said.

“Consumers would look at this quite negatively,” James added.

“They’d like a stronger currency for trips overseas, or buying goods off the internet.”

Bad news for exporters

If you’re part of a business that’s exposed to the global economy, a lower Aussie dollar is rarely welcomed.

Oliver said the sectors hardest-hit would be resource companies that export raw materials to China, which are made into goods that are then exported around the world.

“It’s basically companies that might be exposed to international trade that are most vulnerable.”

“That’s where a lot of the hit is. That will probably continue this week in terms of the share market,” he said.

“If you’re an Australian company that runs a services business, like a bank in Australia, there’s not as much impact.”

“But if you’re an exporter, depending on foreign demand for your product, then there’s more risk. Resources companies are at high risk there.”

Essentially, weaker global growth could see less demand for an Australian export company’s product, which may mean a fall in the company’s share prices, the AMP Capital economist said.

A lower dollar, a stronger Australian economy

However, amid the bad news, a falling Aussie dollar can actually protect the local economy, the economists pointed out.

“It makes Australian companies more competitive internationally – that should help preserve jobs, which might otherwise have been lost [in a scenario where] the Aussie dollar hadn’t fallen, but the global economy weakened,” Oliver told Yahoo Finance.

CommSec’s James said that Australian goods could appear more attractive than overseas products when the Australian dollar was low, whether it was exports, goods on the local stage, or Australian goods competing against imported products.

Looking ahead

What’s in store for the Aussie dollar now?

James said the reason why the Australian currency was so low came down to interest rates.

“What we’ve always got to remember is if we’re looking to cut rates here in Australia, that will put downward pressure on the currency,” he said.

“Alternatively, if the Federal Reserve in the United States continues to cut interest rates, that’s going to put upwards pressure on our currency and downward pressure on their currency.”

“They’re the two things to watch: what’s happened with interest rates, not just here in Australia, but interest rates in the United States,” James said.

The Reserve Bank of Australia announced its monthly decision on the cash rate today at 2:30pm, revealing the August interest rate on hold at 1 per cent.

Oliver speculates that the dollar could fall faster than the year-end target of 65 US cents.

“Often with currency markets, with any financial markets, you get these lurches in one direction or another.”

Yahoo Finance’s All Markets Summit will take place in the Shangri-La, Sydney on the 26th September and will bring together some of the best minds in business, government, academia and entrepreneurship to examine the most critical issues facing Australia. Join us for this groundbreaking event.

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