Could a higher dollar lead to a lower dollar?
With the recent further rise in the Australian dollar against a continued slowdown in China and growing fears about a resource investment cliff, I am beginning to see the prospects of a higher Australian dollar leading to an increasingly uncompetitive position in Australia. This inability to compete due to higher wages, lower returns for exporters, cost to inbound travelers may slow the Australian economy leading to lower interest rates and then a lower Australian dollar.
The question is how high does the Australian dollar need to go before it bites itself in its own bottom?
With the general consensus that our LNG boom may not be the saviour it is expected to be due to the shale gas boom the the US, people are beginning to understand how our persistently high Australian dollar is sending future growth prospects away from Australia.
Our general view at Valor Private Wealth is that interest rates will continue to fall over the coming year and possible the year after that and along with it the dollar will lose its shine as the interest rate differential reduces. There is likely to be a tipping point where the current flow of money into Australian dollars reverses. Where that tipping point sits is unknown, however when it turns, it is likely to be a sharp reversal similar to 2008.