Aussie dollar: 'significant scope' for weakening
The Australian dollar is likely to weaken substantially as the central bank will have to cut interest rates towards global levels, a currency investor said
Australia is going to be hit by a double whammy of rebalancing in China and the peak of an investment cycle in commodities, which will weigh on its growth and ultimately on the Australian dollar's exchange rate, Paul Lambert, head of currency at asset manager Insight Investment, said.
On Tuesday, the Reserve Bank of Australia held its cash rate unchanged at 2.75% after a surprise cut of a quarter of a percentage point at its meeting in May.
The Australian dollar weakened by more than 6% versus the US dollar since early April.
Australian interest rates "are going to start to move towards the rest of the world" as the country's investment boom is "reaching its peak" just as China moves towards relying more on domestic consumption for growth, which requires fewer commodities, Lambert argued.
He said that a few years ago, when China launched a massive stimulus to its economy, Australian firms invested in commodities to boost the country's capacity to export resources; some of these investments are likely to bear fruit now when a weaker global economy could dampen commodity prices.
"We've been short the Aussie dollar for a while," Lambert said.
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"We think we're at the beginning of a weakening of the Aussie dollar. There's significant scope for the Aussie dollar (AUD) to weaken from here."
He said Insight Investment was also short the New Zealand dollar (NZD) and the Japanese yen (JPY), as well as the South African rand (ZAR).
The euro and the dollar are among the long positions, as the ECB "doesn't really believe in QE," Lambert said.
He said the asset management firm was not actively buying dollars but had "other currencies we want to sell and end up being long dollar."
The depreciation of the yen versus the dollar "is significant but we think it's only the beginning," Lambert said.
The Bank of Japan "are going to keep on expanding their balance sheet" to regain some of the country's lost competitiveness, as Japan's share of world trade has fallen by half since the 1990s, he added.The Japanese yen fell around 26% versus the US dollar in the past year.
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