The Australian Dollar could be heading well below 75 cents against the strengthening US dollar, according to analysis by FIIG Securities.
FIIG Head of Markets Craig Swanger said investors who had already invested in the USD were up 8-9% in the past few months but the problem for many was that USD bank accounts earn very little in interest.
Mr Swanger said it was not well known that Australian investors could have a USD exposure and earn up to 7% per annum in income by investing in USD denominated bonds.
“Our clients with a view that the AUD has a lot further to fall have invested directly in bonds issued by Australian companies such as Telstra, Newcrest, Leighton or Transfield, and received income of up to 7% per annum while still having a USD exposure just as they do in a normal USD bank account,” Mr Swanger said.
History can be a poor guide of the future, but the similarities between historic bull runs in the USD and the current world economic scenario are difficult to ignore.
FIIG’s analysis shows that on three occasions in the past 30 years when a slow global economy has been led into recovery by the US, the USD has jumped an average 35% against the AUD.
“Today we face a slow recovery globally, one driven by the US. The IMF, World Bank, OECD and most of the G20 central banks are forecasting the US economy to be growing faster than the G20 average for the next 2-3 years at least,” Mr Swanger said.
“The EU is struggling to keep out of recession for the third time in 5 years, with the critical German powerhouse stalling, and Japan’s recovery threatened by the second round of its new consumption tax starting in 12 months.”
Mr Swanger said a weak global economy and a stronger US economy would predictably see a “flight to safety” through buying USD. The USD is particularly strong in these times against the AUD.
“A falling AUD in times of slower world economic growth is mostly about Australia’s reliance on commodity prices for its terms of trade,” Mr Swanger said.
“Slower world growth typically means emerging economies are growing at below average pace, which in turn is bad for commodity prices. These periods have seen the AUD fall an average of 10-15% per annum for 2-3 years. From its recent peaks, such a fall would result in an AUD/USD exchange rate of 71 cents,” he said.
FIIG’s research team has been writing to clients over the past two months in particular, highlighting the potential upside from investing in US Dollar denominated investments at times of growing uncertainty. Soon afterwards, the AUD fell from 94 cents to its current 87 cents. Clients holding these USD bonds from that time have done well, but this is likely to be just to start of a trend that results in the AUD falling to 75 cents to the USD.