Like in cricket, Australia's dollar has lost its edge

Michael Clarke (R) and Steve Smith of Australia look dejected after failing to take a catch during an Ashes Test.
Stu Forster | Getty Images
Michael Clarke (R) and Steve Smith of Australia look dejected after failing to take a catch during an Ashes Test.

It was not so long ago that the Australian cricket team appeared invincible.

Its heavy hitting openers battered opposing pace attacks. The middle order was manned by a combination of both the stoic and the swashbuckling. And its bowling attack contained a lethal mix of speed, swing, and spin. The team was ranked number one in the world for all but seven months between 1995 and 2009, and won eight Ashes series in a row. Winning yet another series against the English seemed almost an inevitability.

Similarly, it was not so long ago that the Australian economy seemed invincible.

Its economy was underpinned by China's growth and demand for commodities, which helped the "lucky country" avoid the recession which gripped the world's economy in 2008 and 2009. Australia attracted significant foreign direct investment, driven in large part by mining-related capital expenditure.

And with Australia offering by far the most attractive medium-term bond yield in the G10, around four times greater than that of the U.S., and a AAA rating in a world of ever dwindling AAA paper, the country benefited from the quantitative easing (QE)-driven carry trade. As a result, Australia was second only to Canada in terms of central bank asset diversification, and foreigners flooded the debt markets leaving three-quarters of government debt in foreign hands.

(Read more: Australia cuts rates by 25 basis points to record low of 2.5%)

Perhaps no surprise given its strong "team" of exports, portfolio capital flows, and foreign direct investment, the Australian dollar enjoyed unparalleled strength, remaining well above parity, and most estimates of fair value. A strong Australian dollar sitting above parity against the U.S. dollar seemed almost customary.

But there are no such things as inevitabilities in either sport or macroeconomics, and the strengths of both Australia's cricket team and economy led each down an ultimately unfortunate path.

Great players stayed in the cricket team for too long, which did not allow young cricketers to develop and progressively be phased in. The stalwarts of the team then retired in relatively quick succession, passing the mantle to an under prepared and outmatched new generation.

(Read more: Australia to hold election on September 7)

In the case of the economy, the mining boom which benefited the commodity producing areas of Australia in the West lasted long enough that it reduced the imperative to increase productivity. Rather than focusing on research and development or education, politicians instead focused on increasing mining taxes.

And all the while, the commodity super cycle-driven strength of the Australian economy in aggregate masked the Dutch disease-like impact on its much more populous Eastern states, which suffered from both an inappropriate monetary policy and too-strong exchange rate, leading to falling competitiveness and economic stress.

Australia runs both current account and fiscal deficits, and so it is reliant on foreign funding to plug the gaps. But the back up in US nominal and real rates following Mr Bernanke's comments on QE-tapering, combined with the Reserve Bank of Australia (RBA) being forced to cut AUD rates to a now record low of 2.5%, have led to Australia's yield advantage falling significantly and will deter portfolio flows.

(Read more: For Australia, 'R' may not mean recession)

Furthermore, Chinese growth is no longer a tailwind, and Australia's' domestic economy is also faltering, suffering from rising unemployment and an overpriced property market. And so it's hard to see foreign direct investment filling the gap either.

Something has to give.

For the Australian cricket team, it was losing its number one ranking and a precipitous fall down the world rankings, culminating in the confirmation this week that it has lost the Ashes for a third straight time.

For the Australian economy, it looks like the Australian dollar will have to head much lower from here, driven by weaker economic growth and capital outflows.

Simon Smiles, Chief Investment Officer UHNW, UBS Wealth Management