Leading local bond fund manager, Vimal Gor from BT Investment Management, has used his latest monthly report to warn of his new base case that the $AUD will fall to 40 US cents. His original call was for the $AUD to fall to 50 US cents but he now believes this is too optimistic. Vimal predicts the Australian cash rate will fall to 1.00% and, as a consequence, the exchange rate will fall.
This are not the thoughts of someone that has just realised things are worse than predicted. Vimal has held a longstanding and public view that the central bank will be forced to cut rates in Australia as growth falters and price deflation is imported from China, Europe and Japan. His bond fund has consistently been amongst the best performing in the country as interest rates have continued to fall.
In essence the view he holds is that central banks around the world, principally European and Japanese central banks, are losing the fight against low growth. Cutting interest rates to historically low levels (Japanese 10 year bonds are trading at around -0.12%, German 10 year bonds are trading at a record low 0.04%, Swiss bonds out to around 22 years are trading at negative rates) to boost growth and demand has not had the effect that was hoped for. Consumers who are worried about the future are not spending.
In Australia, we have a large reliance on foreign capital to fund our lifestyle and budget deficits, hence the further we cut rates, the less attractive we are as an investment destination. Once foreign investors realise this, foreign capital will flee, seeking a safer investment destination. The early warning signs of this are the steepening yield curve between 10 years and 20 years. Despite yield curves flattening over the globe, our curve at the long end is steepening suggesting investors are demanding more premium for the risk they are taking.
With a flagging economy and a deteriorating federal budget position, unless there is some sort of growth miracle the day of reckoning will come. And when it does the $AUD will face a precipitous collapse that will force our hand to restructure our economy, pay back debt and curb spending.
Vimal Gor’s full report can be viewed here.