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Where the Australian Dollar Is Headed

Wednesday, 2 May 2012 | 7:32 PM ET
Sydney Harbor Bridge & skyline
Scott E Barbour | Photographer's Choice | Getty Images
Sydney Harbor Bridge & skyline

The Australian dollar has had a rough ride lately, and this strategist says more troubles await.

Time was, the Australian dollar's fortunes rested heavily on commodity pricesand China's growth prospects. When both of those factors were strong, so was the Aussie.

Well, the outlook for China has dimmed somewhat, and a recent upward move in commodity prices has left the Australian dollar cold. The Reserve Bank of Australia's larger-than-expected interest rate cut earlier this week only added to the Aussie's troubles.

But if you're thinking it's time to go bargain hunting, Neil Mellor, a currency strategist at Bank of New York Mellon, has a warning for you. "Although many calls for a weaker AUD have gone awry in the post-crisis period, there would now appear to be sufficient elements in the equation for the currency to finally succumb to gravity," he wrote in a note to clients.

Mellor thinks China will be hard pressed to avoid a hard landing in its housing sector, and that will stunt economic growth in the country. He is also worried about soft housing prices in Australia and the impact on the economy there. And he argues that with Australian inflation moderating, the central bank will not be averse to further interest-rate cuts to stimulate the economy.

Based on Tuesday's policy statement, he says, "the Bank would certainly be moved to act if the 50bp cut is not passed on in full to the consumer by ‘high street’ banks (as recent intimations from the sector suggest may be the case)."

So where is the Aussie headed? "Offset to some extent by a highly liquid environment, a gradual move back towards parity in 2012 remains our best guess," Mellor wrote.

Your move.

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