The outlook for the Australian dollar has gotten dimmer with currency analysts downgrading their forecast for the Aussie yet again, according to a poll by Reuters.
Further expectations of rate cuts by the Reserve Bank of Australia (RBA) and a darkening outlook for the economy from the ongoing global trade wars are the key reasons for the bearish Aussie dollar forecast.
Australian dollar winners and losers
This will have implications for S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stocks. Those with large US dollar exposure will benefit from the weak exchange rate and they include the Boral Limited (ASX: BLD) share price and RESMED/IDR UNRESTR (ASX: RMD) share price, just to name a few.
On the flipside, those who sell locally and have US dollar costs could be disadvantaged. These include retailers like Premier Investments Limited (ASX: PMV) – although they probably have more to worry about than the exchange rate – and Coca-Cola Amatil Ltd (ASX: CCL).
But it's not all bad news for the Aussie. The average forecast of the 45 analysts surveyed by Reuters lowered their prediction for our currency to US69 cents for the next three months from US71 cents.
No crash forecasted for the Aussie battler
The Aussie is currently fetching US69.75 cents so the drop isn't too extreme, although it suggests investors shouldn't bank on a near-term rebound if the pollsters are on the money.
There's also debate about whether the Aussie battler will stay in the doldrums for long given the recent comments from the US Federal Reserve that it stands ready to cut rates too and traders believe the Fed could cut once in September and again in January next year.
Dinky-di Aussie believers also point to the resilient iron ore price as another reason why you shouldn't be shorting our dollar. The iron ore price has defied all the naysayers and is staying firm, which in turn is supporting the Aussie as the commodity is our nation's biggest export.
This is why analysts' 12-month forecasts for our dollar diverge greatly with the top end of the scale predicting US81 cents while the bottom stands at US64 cents. The experts really have no idea!
Foolish takeaway
If I had to guess though, I think the risks is to the downside for the Aussie. Even if the Fed cuts rates twice, it would bring their official interest rate down to 2% when ours are heading to 1% or 0.75% (at least that's what the futures market is saying).
A global trade war will hurt the US but it's more than likely to hurt China more, and China is far more important to our financial prosperity than the US.
Let's also not forget that the greenback is the reserve currency for the world. In a recession, or time of stress, investors are more likley to flock to the US dollar than the Australian dollar.
The lofty commodity price rug will be pulled from under us too if US President Donald Trump slaps tariffs on an additional US$325 billion of Chinese imports, and the latest reports indicate he will decide whether to pull the trigger at the end of the month after he meets with his Chinese counterpart, Xi Jinping, at the G20 meeting.
In the meantime, your guess on where the Aussie will end up in a year will be just as accurate as the experts.
