US inflation AUD Collapse to 65 and 58 cents
The Australian dollar plunged through 70 cents and is headed for 65 cents.
Maintaining export revenues in a fast-slowing global economy with a possible peak in commodities, will be paramount to this country surviving what will be a sharp domestic slow-down regardless of who wins the federal election.
‘Look across the valley’ mania reached fever pitch in New York last night, as inflation hesitated, dropping slightly from 8.5% to 8.3%.
The stock market swings were intense as day traders and investors first rushed to buy on the astounding news. So they thought. Then intense selling. Then yet another buying frenzy.
After a savage whipsaw day, however, the market ended at its lows.
Taking a look at the 25-year chart of US inflation, it would be a fool indeed who would see any pullback up at these extreme levels, as an all-clear for the US economy.
Tremendous damage has already been done, being done, even if inflation had suddenly fallen back to 3%. The idea that a small hesitation from 8.5% to 8.3% was a wonderful development, is patently absurd.
The US economy and indeed European and China economies are in deep trouble. Stocks cannot maintain their own overly inflated valuations in this environment.
The Northern Hemisphere slowdown is now well entrenched. Stock markets have yet to fully price in this stark reality.
Australian markets have appropriately remained under pressure and we should all be expecting further significant downside in these markets.
A lot of people are surprised the Australian dollar has fallen below 70 cents again?
I would suggest expect further sharp declines.
Personally, I am delighted, having at first forecast a fall to 70 cents when the currency was bizarrely trading at .7745 mid-last year. And at the end of 2021, my official 2022 forecast was 65 cents. With the further risk to 58 cents in 2023. We do seem to be on track for these targets, and we should all be glad that we are.
The weight of a behind the curve RBA raising rates far too late, on top of already runaway inflation, with a hangover impact from the highest per-capita covid government, spending in the world would bring any economy to its knees.
That Australia’s external trade bonanza may already be peaking at the same time is particularly worrying.
The US Federal Reserve has also been well behind the curve relative to several other central banks around the world and now finds itself in the extreme position of having to aggressively raise interest rates when inflation is already well established above 8%. You cannot have worse central bank performance than this.
Nevertheless, for Australia the situation we are left with is that 50-point rate hikes in the US will persist for the time being. This means the interest rate differential favouring the US dollar over the Australian dollar will continue to build.
Hence a growing interest rate advantage of the US dollar over the Australian dollar, while the US dollar continues to strike higher on safe-haven buying and the Australian dollar becomes heavy as commodity prices moderate.
My target remains 65 cents this year. Risk 58 cents next year.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities