‘The Australian dollar could hit 40 US cents’: Economist makes huge call about the economy – with some to win BIG …. and others to lose

An investment strategist in the superannuation industry is predicting the Australian dollar will plunge to a record-low of US 40 cents within five years – with significant consequences for the economy. 

David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealth, is expecting the AUD to sink to levels unseen since it was floated almost four decades ago because Australian interest rates are still so much lower than those in the US. 

Mr Llewellyn-Smith also argues weaker Chinese economic growth could weigh down the Australian dollar should demand for iron ore – the commodity used to make steel – plummet.

Meanwhile, he is predicting the US economy could experience an American-led artificial intelligence boom – adding to the Australian dollar’s woes. 

If the Aussie currency fell that low, overseas holidays, particularly to the U.S., would be more expensive as the greenback surged, the finance expert predicted. 

But surprisingly, the price of imported goods for Australians may not end up surging as high – with strong levels of immigration in Australia suppressing wages and leading to lower inflation.

An investment strategist in the superannuation industry is predicting the Australian dollar will plunge to a record-low of US 40 cents within five years (pictured is a stock image)

An investment strategist in the superannuation industry is predicting the Australian dollar will plunge to a record-low of US 40 cents within five years (pictured is a stock image)

An investment strategist in the superannuation industry is predicting the Australian dollar will plunge to a record-low of US 40 cents within five years (pictured is a stock image)

‘Don’t get me wrong: I don’t see this happening overnight, by the way,’ he told Daily Mail Australia. 

‘This is the next five to ten years. This is a long-term forecast.

‘I think we’re well and truly into this process.’ 

The Australian dollar’s current 66 US cent level is already weaker than the 72 US cent level of January.

A fall to 40 US cents would see the Australian dollar sink below the record low closing level of 48.06 US cents in December 2008 during the Global Financial Crisis.

It would also be worse than 48.65 US cent mark reached in September 2001, after terrorist attacks in New York and Washington DC added to the malaise from the dot.com crash.

Mr Llewellyn-Smith, who is also an economist, argued the Australian dollar had further to fall because the Reserve Bank’s 11-year high cash rate of 4.1 per cent was still much lower than the US Federal Reserve’s equivalent federal funds rate of 5.25 to 5.5 per cent, which is at a 22-year high.

‘The US economy is looking quite strong – it may have a recession but what we can see coming in the next cycle is the artificial intelligence boom,’ he said.

Such an American-led AI boom is being compared to the debut of the expansion of the internet during the mid-1990s which led to a stronger US greenback. 

‘You end up with US growth outperforming everywhere else, they have higher interest rates than everywhere else so their dollar outperforms everywhere else,’ Mr Llewellyn-Smith said. 

‘It’s a rerun of the 1990s.’

China’s growth in question, then Australia’s to fall 

In Australia, the 30-day interbank futures market is now betting the Reserve Bank hikes are over, with the Commonwealth Bank, Westpac and ANZ all agreeing.

This is expected to occur as an economic slowdown in China causes demand to fall for Australian iron ore, which in turn weakens the Australian dollar.

A weakening of Australia’s terms of trade – the ratio of prices received for exports compared with imports – is being likened to the late 1980s when the Japanese economy’s rapid growth flatlined.

In 2023, it’s the unwinding of China’s apartment building glut, which means less demand for steel and Australia’s biggest export, iron ore. 

‘China’s at the same pivot point now – as Japan was in 1989,’ he said. ‘The thing is China is like so much bigger than Japan ever was.

‘They’ve overbuilt at a scale that not only rivals but well and truly surpasses Japan and they have a very, very tangled and unstable debt bubble underpinning their property market that is in the process of unwinding.’

A collapse in demand and iron ore and metallurgical coal would mean a big drop in the Australian dollar.

‘Any time China’s growth comes into question, the Australian dollar will fall,’ he said.

‘It has dramatic effects on the terms of trade and the TOT, along with interest rate spreads, those are the two pillars of the value of the dollar.’

David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealth , is expecting the AUD to sink to levels unseen since it was floated almost four decades ago because Australian interest rates are still so much lower than those in the US

David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealth , is expecting the AUD to sink to levels unseen since it was floated almost four decades ago because Australian interest rates are still so much lower than those in the US

David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealth , is expecting the AUD to sink to levels unseen since it was floated almost four decades ago because Australian interest rates are still so much lower than those in the US

Mr Llewellyn-Smith said a weaker Australian dollar in years to come would be unlikely to cause an inflation problem because high immigration would suppress wages growth (pictured is a Sydney construction worker)

Mr Llewellyn-Smith said a weaker Australian dollar in years to come would be unlikely to cause an inflation problem because high immigration would suppress wages growth (pictured is a Sydney construction worker)

Mr Llewellyn-Smith said a weaker Australian dollar in years to come would be unlikely to cause an inflation problem because high immigration would suppress wages growth (pictured is a Sydney construction worker)

China’s economic growth of 6.3 per cent annually, in the June quarter, is comparable to the extended lockdown of 2022.

Mr Llewellyn-Smith said a weaker Australian dollar in years to come would be unlikely to cause an inflation problem because high immigration would suppress wages growth.

‘We’ve got this wild, mass immigration boom which is very deflationary as well for wages,’ he said.

‘We’ve been through these very low Australian dollar periods before and it wasn’t particularly inflationary – import prices don’t always rise because what happens sometimes is the importer doesn’t have the pricing power to lift the price.’ 

In the September quarter of 2001, inflation fell to 2.5 per cent, down from 6.1 per cent, even though the Australian dollar had dropped below 50 US cents, just as immigration was surging.

As the US boomed, a slowdown in China was expected to weaken the currencies of economies more closely tied to China like Australia, the European Union and large parts of Asia. 

This means a holiday to New York would be more expensive but not necessarily to Paris or Phnom Penh.

‘I would expect this unwind of the China growth story to hit all the emerging markets as well so all of their currencies will fall too,’ Mr Llewellyn-Smith said.

If the Aussie currency fell that low, overseas holidays, particularly to the U.S., would be more expensive as the greenback surged, the finance expert predicted (pictured is a drone light show in New York outlining the Statue of Liberty)

If the Aussie currency fell that low, overseas holidays, particularly to the U.S., would be more expensive as the greenback surged, the finance expert predicted (pictured is a drone light show in New York outlining the Statue of Liberty)

If the Aussie currency fell that low, overseas holidays, particularly to the U.S., would be more expensive as the greenback surged, the finance expert predicted (pictured is a drone light show in New York outlining the Statue of Liberty)

This is expected to occur as an economic slowdown in China causes demand to fall for Australian iron ore, which in turn weakens the Australian dollar (pictured are Evergrande apartment towers in Beijing)

This is expected to occur as an economic slowdown in China causes demand to fall for Australian iron ore, which in turn weakens the Australian dollar (pictured are Evergrande apartment towers in Beijing)

This is expected to occur as an economic slowdown in China causes demand to fall for Australian iron ore, which in turn weakens the Australian dollar (pictured are Evergrande apartment towers in Beijing)

‘Plus I would expect Europe to deflate a fair bit because it’s very dependent on Chinese growth.

‘It becomes much more expensive to travel to the US or anywhere that is pegged to the US but there will be other places that it will be much more similar to today and I think Europe might be okay.’

The Australian dollar reached parity with the US currency in 2010 as Chinese demand for iron ore continued after the Global Financial Crisis. 

But Mr Llewellyn-Smith said that would be unlikely to happen again because India, now the world’s most populated nation, isn’t centrally planned like China.

Source: | This article originally belongs to Dailymail.co.uk

Content source – www.soundhealthandlastingwealth.com

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