2001 seems like a long time ago now…
Cast your mind back and you might remember it was the year Enron famously filed for bankruptcy. And it was the year that Apple released the first version of the iPod.
It was also the year the IRA finally laid down its arms after decades of fighting the British. A topical discussion these days given the Brexit situation and questions over the new Irish border.
But 2001 will probably be remembered for being the year that the twin towers in New York were brought down in a horrendous act of terror.
I remember watching it live on TV as the second plane crashed into tower number two. It felt like the start of a Third World War.
I was living in Scotland at the time and was about to move to Australia in just a few weeks. Not the best time to be catching a plane, I remember thinking.
But despite all that, it was a very good time to make the move to Australia for a different reason…
Heading back to 2001
Back in 2001, Australia was cheap.
Or should I say the Aussie dollar.
You could buy one whole Aussie dollar for just 34 British pence! This meant my savings got me almost three times as many dollars when I arrived in Perth in 2001.
Now it seems Australia is getting cheap once again…
Source: Incredible Charts
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As you can see the Aussie dollar has been falling against the US dollar since 2011.
This has an impact on your daily life.
For one it means prices of goods in US dollars become more expensive. Whether that’s holidays, clothes, cars or commodities.
This trend only looks like it’s going to get worse.
As the chart shows, we’re about to approach the GFC lows of 2009 at 60 cents. And if we crash through that, we could very well start heading for the lows of 2001, at around 50 cents.
There’s a few compelling reasons why this is looking likely…
The Aussie dollar freefall thesis
There’s three main things that effect the value of the Australian dollar. And right now, all are pointing to a potential freefall scenario.
- Interest rates
- Chinese demand for commodities
- Economic sentiment
Let’s start with interest rates…
It’s no secret that the Reserve Bank of Australia (RBA) is likely to cut interest rates further this year.
The governor, Phillip Lowe, told the government’s standing committee earlier this month:
‘It’s possible that we end up at the zero lower bound. I think it’s unlikely, but it is possible. We are prepared to do unconventional things if the circumstances warranted it.’
The rate today sits at 1%.
Lower interest rates put pressure on the Australian dollar as it reduces demand from international speculators who borrow in low interest rate currencies and invest in Aussie dollar accounts to pocket the interest difference.
This is known as a carry trade. But it only works when that interest rate difference between the borrowing currency and the saving currency is in place, and the world isn’t worried about the Aussie dollar falling steeply.
Which bring us to Chinese demand for Australian commodities…
This is the fundamental — or non-speculative — driver of demand for Australian dollars.
When China is booming and buying up our coal, iron ore and oil, then they buy Australian dollars in order to purchase our commodities.
Since 2001, this has put upwards pressure on the Aussie dollar.
As the Asian Review put it:
‘China has underpinned Australia’s growth since the 2000s by driving up demand for iron ore and coal. Australia’s exports of goods and services climbed to AU$386.6 billion ($276 billion) in 2017 from AU$145.3 billion in 2000. Exports to China multiplied 17 times over the same period to AU$115.9 billion from AU$6.8 billion. The East Asian country now accounts for 30% of Australia’s exports.’
But with the China–US trade war ratcheting up recently, commodity prices are now falling hard. In fact, the Bloomberg Commodity Index is close to 2001 levels!
Source: Economic Times
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Lastly, I’m sure you know as well as I do, what economic sentiment is like right now.
The latest AAII Investor Sentiment Survey said that its members expect a recession in the next 12–24 months.
When everyone is fearful, a lot of money moves out of risky assets and into safe havens. That means going into gold and US dollars for a lot of investors.
That could put further pressure on the Aussie dollar.
Not all doom and gloom
It really isn’t…
The falling Australian dollar also provides opportunities. If you can spot them before the investing herd.
Look for companies that sell goods in US dollars, but have their costs in Australian dollars. Profit margins will increase for businesses in this situation.
The obvious pick here is Aussie gold miners.
They’re getting a double whammy from the fear premium, which means gold prices are rising — both in US and Aussie dollar terms.
But it’s not just gold stocks.
Cochlear Ltd [ASX:COH], Amcor PLC [ASX:AMC] and Sonic Healthcare Ltd [ASX:SHL] are three ASX-listed stocks that get a significant proportion of their earnings in US dollars.
Which means more falls could be good for them. Barring global catastrophe of course.
Food for thought at least…
Editor, Money Morning
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