Imported goods would briefly be more expensive if the Australian dollar dropped under 50 US cents based on decades of history.
The local currency fell below 48 US cents once in early 2001 as the American tech wreck worried investors – that was its record low to date.
But it also plunged sharply at the start of the pandemic in March 2020, in late 2008 during the Global Financial Crisis and after the 1997 Asian financial crisis.
David Llewellyn-Smith, the chief strategist with MB Super and Nucleus Wealth, is predicting the local currency will sink to an all-time low of 40 US cents within five years – down from a weaker-than-average 65.7 US cents now.
The economist, who co-wrote The Great Crash of 2008 with Australia’s former ambassador to China, Ross Garnaut, is basing his prediction on the US dollar surging during a tech boom as China’s economy slowed.
His forecast would see the Australian dollar sink to depths that have never been reached since it was first floated in December 1983.
But he urged Australians not to worry about an inflation surge.
‘We’ve been through these very low Australian dollar periods before and it wasn’t particularly inflationary,’ Mr Llewellyn-Smith told Daily Mail Australia.
Imported goods would briefly be more expensive if the Australian dollar dropped under 50 US cents based on history (stock image of Australian banknotes)
David Llewellyn-Smith, the chief strategist with MB Super and Nucleus Wealth, is predicting the local currency will sink to an all-time low of 40 US cents within five years – down from a weaker-than-average 65.7 US cents now
Unlike previous Australian dollar crashes, there won’t be a resurgence in Chinese iron ore demand to quickly rescue the currency.
‘Don’t get me wrong: I don’t see this happening overnight, by the way,’ he said.
‘This is the next five to ten years. This is a long-term forecast.
‘I think we’re well and truly into this process.’
While importers traditionally order goods in bulk, based on where the currency is at, the Australian dollar’s low points have also traditionally coincided with economic weakness.
This has meant there wasn’t the strong domestic demand associated with higher consumer prices.
‘Import prices don’t always rise because what happens sometimes is the importer doesn’t have the pricing power to lift the price so they just absorb it in their margins,’ he said.
Tech wreck of 2001
The Australian dollar’s all-time low, to date, was reached in April 2001 when it fell to 47.78 US cents following the bursting of the dot-com bubble.
During that period, inflation did surge to an 11-year high of 6.1 per cent, putting it well above the Reserve Bank’s 2 to 3 per cent target.
The consumer price index then was similar to where it is now.
But inflation then halved to an annual pace of 2.5 per cent by the September quarter of 2001, even though the Australian dollar had remained weak and fallen back to 48.65 US cents from 52 US cents a fortnight earlier.
The September 11 terrorist attacks in New York and Washington DC at that time also diminished financial market risk appetite.
The Australian dollar tends to struggle during times of weak global growth, which means there’s less international demand for crude oil.
Cheaper petrol and transport costs means that consumer prices haven’t traditionally stayed high, even when the currency has been particularly weak.
His forecast would see the Australian dollar sink to depths that have never been reached since it was floated in December 1983. But Australians are urged not to worry about an inflation surge (pictured is a shopper in Sydney’s eastern suburbs)
Covid pandemic of 2020
The start of the Covid pandemic in March 2020 saw the Australian dollar plunge to 55.71 US cents, down from 69 US cents in late January, but it quickly recovered.
That also coincided with national lockdowns that saw the Australian share market shed a third of its value in just five weeks, before it too soared again thanks to government stimulus spending.
Inflation had already remained under 2 per cent since late 2018 and by the June quarter of 2020, Australia experienced deflation for the first time since 1998.
Global Financial Crisis of 2008
The GFC of 2008 saw the Australian dollar crash from a 25-year high of 98.49 US cents in July that year to 60.12 US cents by late October.
Inflation had spiked to 5 per cent in the September quarter of that year but by early 2009, it had halved to 2.4 per cent as the Australian dollar recovered to 70 US, coinciding with Chinese iron ore demand strengthening.
This time, Mr Llewellyn-Smith said there won’t be a resurgence in Chinese demand for Australian iron ore, the commodity used to make steel, following the overbuilding of ghost apartment towers.
‘Any time China’s growth comes into question, the Australian dollar will fall,’ he said.
‘Really, the only way out of this for China in the long run is for their currency to fall and the Australian dollar fall is very attached to the yuan.’
The Australian dollar would be even weaker than the euro, with the European Union also a major trading partner with China.
‘The euro, I would expect, to be relatively weak as well – not as weak as the Aussie dollar,’ he said.
That means those hoping to travel overseas would get a better deal travelling to Europe than the United States.
‘It will become much more expensive to travel to the U.S. but there will be other places that will be much more similar to today,’ Mr Llewellyn-Smith said.
‘I think Europe might be okay.’
The start of the Covid pandemic in March 2020 saw the Australian dollar plunge to 55.71 US cents, down from 69 US cents in late January, but it quickly recovered (pictured is Sydney airport during that month)
The gap between Australian and American interest rates is another factor that traditionally determines currencies.
The Reserve Bank of Australia’s 11-year high cash rate of 4.1 per cent is still much lower than the US Federal Reserve’s equivalent federal funds rate of 5.25 to 5.5 per cent, now at a 22-year high.
Mr Llewellyn-Smith is predicting American interest rates were likely to stay high as an artificial intelligence boom boosted productivity, which would in turn see the greenback remain at high levels.
He likened it to the late 1990s when the expansion of the internet boosted the US dollar.
‘You end up with US growth outperforming everywhere else – they have higher interest rates than everywhere else so their dollar outperforms everywhere else,’ he said.
‘It’s a rerun of the 1990s. In the next cycle is the artificial intelligence boom: you’ve got a post-commodities deflation coming out of Asia and in the US, you have the rise and rise of the tech boom.
‘That’s a productivity boom coming in the US that replicates the 1990s – that was a very strong period for the US dollar.’
Asian financial crisis of 1997
In a case of history repeating, the Australian dollar plunged in 1997 during the Asian financial crisis, dropping from 79.44 US cents at the start of the year to 57 US cents by September 1998.
In any case, Australian inflation stood at just 1.4 per cent, following a period of deflation in late 1997 and early 1998.
Weakness in Asia and economic strength in the United States is expected to occur again, but with more dramatic consequences for the Australian dollar during the next five years.
‘It’s definitely like a structural, long-term thing – not indicating overnight or even a few years,’ he said.
The days of parity with the US dollar are also a distant memory with India, now the world’s most populous nation, unlikely to buy Australian iron ore and coal to the same extent as China.
‘Not unless another China comes along. India’s not China. It’s not centralised, it can’t get a centralised urbanisation boom going.’
The Australian dollar was equal to the greenback during the era of the fixed exchange rate, from the late 1960s until the early 1980s, and again on and off from November 2010 to May 2013, during the resumption of the China-led mining boom after the GFC.
