Capital Economics’ Thomas Mathews has forecast extended weakness for the Australian dollar.
“We expect the Australian dollar to weaken for the rest of this year and next for two key reasons,” he wrote in a note.
“Firstly, we think investors are underestimating how soon RBA rate hikes will be reversed. After all, there are already signs that the country’s housing sector is starting to slow: residential construction, for example, it fell by almost 7 percent. [quarter-on-quarter] in Q2.
“This appears to have partly reflected supply shortages. But the sector is sensitive to rising interest rates, and with house prices falling in August at their fastest pace since 1983, we suspect it won’t be long before he finds himself in deeper trouble.
“As a result, we expect the RBA to reverse course next year, as it has done during recent housing downturns. This, we believe, will cause Australian government bond yields to fall next year, and much higher than US Treasury bond yields, putting downward pressure on the Australian dollar.
“Secondly, we believe Australia’s terms of trade will deteriorate as China’s economy, and its real estate sector in particular, continues to falter. While policymakers are providing some support, e.g. , through policy rate cuts, we do not believe they have done – or will do – enough to move the needle on the country’s economy. One consequence of this is that we suspect that the prices of Australia’s metal exports they will fall shortly.”