The Australian dollar has benefited from several long-term trends - and this strategist says they're getting old.
Remember when commodity currencies could do no wrong? Between 2001 and 2008, currencies of commodity-exporting countries like Australia and Canada rose at an annual rate of 12 percent.
What a difference a financial crisis makes. Commodity currencies' price growth has slowed dramatically since 2008, along with prices of commodities.
And Ken Dickson, investment director, currency at Standard Life Investments, says things are about to get worse - especially for the Australian dollar.
"The currency looks priced well above perfection," he wrote in a note to clients. "Inflationary expectations are slowing markedly and employment conditions have softened. Local interest rates have fallen more quickly than has so far been reflected in currency movements, as have key commodity prices. Expectations for Chinese growth prospects are slipping while risk appetite has taken a back foot."
That's bad - and there's more. Dickson says that because the Australian dollar has been traded as the archetypal commodity currency, a great proxy for risk appetite, and as a high-yielding component of carry trades, the currency "has become one of the world’s most liquid currencies – to an extent far beyond its economic significance."
Its liquidity, combined with its strong performance, made the Aussie attractive to the deepest pockets of all: central banks. Dickson estimates that there has been about $90 billion in new Aussie dollar demand since 2008, which of course has also helped the currency stay strong.
But between slowing growth in China, waning demand for commodities, and general concerns about the global economy, key underpinnings for the Australian dollar are shrinking. And if its performance starts to decline as well, Dickson says, "a further positive driver for the AUD may be removed over the years ahead."
MULTI CURRENCIES v The Dollar
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