‘The Australian dollar could hit 40 cents’: Economist makes big claims about the economy – with some set to win BIG… and others to lose

A pensions investment strategist predicts the Australian dollar will fall to a record low of 40 US cents within five years – with significant implications for the economy.

David Llewellyn-Smith, the chief strategist at MB Super and Nucleus Wealthexpect the AUD to fall to levels unseen since it went public almost four decades ago because Australian interest rates are still so much lower than those in the US.

Mr Llewellyn-Smith also argues that weaker Chinese economic growth could weigh on the Australian dollar if demand for iron ore – the raw material used to make steel – plummets.

Meanwhile, he predicts the US economy could see an American-led artificial intelligence boom, which would compound problems for the Australian dollar.

If the Australian currency fell that low, foreign holidays, especially to the US, would become more expensive as the dollar rises, the financial expert predicted.

But surprisingly, the price of imported goods for Australians will not ultimately rise that much – with high immigration in Australia suppressing wages and leading to lower inflation.

“Don’t get me wrong, I don’t see this happening overnight,” he told Daily Mail Australia.

“This is the next five to 10 years. This is a long-term forecast.

“I think we’re in a good place in this process.”

The current level of 66 US cents for the Australian dollar is already weaker than January’s level of 72 US cents.

A fall to 40 US cents would see the Australian dollar fall below the all-time low of 47.78 US cents reached in April 2001 after the dot-com bubble burst.

It would also be worse than the 48.65 US cents reached in September 2001, after terrorist attacks in New York and Washington DC further exacerbated the malaise.

Mr Llewellyn-Smith, who is also an economist, argued that the Australian dollar should fall further because the Reserve Bank’s 11-year high cash rate of 4.1 percent was still much lower than the equivalent Federal Funds rate of the US Federal Reserve from 5.25 to 5.5. percent, which is the highest level in 22 years.

“The US economy looks pretty strong – there may be a recession, but what we could see in the next cycle is the artificial intelligence boom,” he said.

Such American-led productivity growth in AI has been compared to the expansion of the Internet in the mid-1990s, which led to a stronger US dollar.

“Ultimately, US growth is outperforming everywhere, they have higher interest rates than everywhere else, so their dollar is performing better everywhere,” Mr Llewellyn-Smith said.

“It’s a repeat of the 1990s.”

If China’s growth is at stake, Australia’s will decline

In Australia, the 30-day interbank futures market is now betting that the Reserve Bank hikes are over, which the Commonwealth Bank, Westpac and ANZ all agree on.

This is expected to happen as an economic slowdown in China causes demand for Australian iron ore to fall, which in turn weakens the Australian dollar.

A weakening in Australian terms of trade – the ratio of prices received for exports compared to imports – is compared to the late 1980s, when the Japanese economy’s rapid growth leveled off.

By 2023, this will be the end of China’s apartment building glut, meaning less demand for steel and Australia’s biggest export, iron ore.

“China is now at the same pivot point as Japan was in 1989,” he said. ‘The point is that China is so much bigger than Japan ever was.

“They have overbuilt on a scale that not only rivals but actually exceeds Japan, and they have a very, very confused and unstable debt bubble supporting their real estate market, which is in the process of unwinding.”

A collapse in demand for iron ore and metallurgical coal would mean a big drop in the Australian dollar.

“Every time China’s growth is questioned, the Australian dollar will fall,” he said.

“It has dramatic consequences for trading conditions and the TOT, together with interest rate differentials, which are the two pillars of the dollar’s value.”

China’s economic growth of 6.3 percent per year in the June quarter is comparable to the extended lockdown of 2022.

Mr Llewellyn-Smith said a weaker Australian dollar was unlikely to cause an inflation problem in coming years as high immigration would suppress wage growth.

“We are facing a wild, massive wave of immigration that is also very deflationary for wages,” he said.

“We’ve seen such very low periods for the Australian dollar before and it wasn’t exactly inflationary. Import prices don’t always increase because sometimes what happens is the importer doesn’t have the pricing power to increase the price.”

In the September quarter of 2001, inflation fell from an annual rate of 6.1 percent to 2.5 percent, even though the Australian dollar had fallen below 50 US cents just as immigration increased.

While the US prospered, a slowdown in China was expected to weaken the currencies of economies more closely linked to China, such as Australia, the European Union and much of Asia.

This means that a holiday to New York would be more expensive, but not necessarily to Paris or Phnom Penh.

“I expect this disruption to the Chinese growth story will also hit all emerging markets so that all their currencies will fall as well,” Llewellyn-Smith said.

‘Moreover, I expect that Europe will become considerably empty, because the country is very dependent on Chinese growth.

“It’s going to be a lot more expensive to travel to the US or anywhere connected to the US, but there will be other places where it will be a lot more like today and I think Europe might be OK.”

The Australian dollar reached parity with the US currency in 2010 as Chinese demand for iron ore continued following the global financial crisis.

But Mr Llewellyn-Smith said this is unlikely to happen again because India, now the world’s most populous country, is not centrally planned like China.