Skip to navigationSkip to contentSkip to footerHelp using this website - Accessibility statement
Advertisement

Australian dollar may hit US50¢ as commodities prices fall, Kaizen Capital says

Mark Mulligan
Mark MulliganWorld editor
Updated

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Subscribe now

Already a subscriber?

Despite its rise in recent days, the Aussie is now seen as close to fair value, but should continue to track the price of key commodities such as iron ore and coal.

According to most modelling, the currency's present level near US73¢ – it was fetching US73.21¢ – clearly reflects the country's terms of trade, along with the difference in bond yields between Australian and the United States.

A resurgence in the greenback has clipped the Aussie. FDC

When the US Federal Reserve finally lifts its target rate, the local unit is expected to depreciate further, moving closer to US70¢.

Any further declines in commodity prices will have the same effect.

Just how much further iron ore and coal sink, however, is open to debate.

Advertisement

While some commentators say prices have stabilised, research from fund manager Kaizen Capital argues that, if history is any guide, they still have a way to fall.

Using the Thomson Reuters Equal Weighted Continuous Commodity Index, chief investment officer Connor Grindlay says it's too soon to call the bottom of the cycle.

"Typically, commodity bull markets experience large – three to four times – increases, which last for a decade and are then are followed by periods where prices do nothing, or fall," he wrote.

In the bull market of the 1970s, the index rose 3.5 times in value from October 1971 to November 1980.

It then fell 46 per cent during the next 21 years, albeit with some deviations, before bottoming out in October 2001.

"In the next commodity boom, which started in October 2001, prices once again rose sharply and the index rose by 3.8 times in value, peaking in April 2011," writes Mr Grindlay.

Advertisement

In each of those cycles, the Australian dollar peaked or bottomed out just months after the index, hitting, for example, highs of $US1.19 in January1 981 and $US1.10 in July 2011, and a low of US46.3¢ in April 2001.

Following this pattern, if the present downtrend still has years of life in it, the Aussie could eventually trough near US50¢, Mr Grindlay argues.

The capacity glut, coupled with slowing growth rates in China, points to further declines in key commodity prices, he says.

"The high prices of the 2000 bull market, just like in the 1970s, spurred commodity producers to invest heavily and increase supply," he says.

"When supply exceeds demand, prices fall.

"We believe that is exactly what is happening today.

"In addition, the world economy is much weaker than forecasters thought in 2007, so the expected demand has not materialised but the increase in supply has."

Mark Mulligan is the world editor and a former markets and economics writer. He was a Financial Times correspondent. Connect with Mark on Twitter. Email Mark at mark.mulligan@afr.com.au

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Subscribe now

Already a subscriber?

Read More

Latest In Equity markets

Fetching latest articles

Most Viewed In Markets