The Australian dollar is back around the .7450 cents level after it came under heavy selling pressure overnight.
“We saw the Aussie peaked at around .7515 last night until it was pulled back down,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
According to McKenna, while it is easy to say that the Aussie dollar fell on the back of lower oil price, he thinks there are other factors putting pressure on the currency.
“My sense is that the Aussie dollar’s troubles are starting to run deeper,”
He added: “I am increasingly getting a sense that the Aussie is at risk of a significant capitulation at some point in the next year.”
From his perspective, McKenna said while the concerns about Chinese growth, iron ore prices and bond spreads are the easy and default explanation for the Aussie dollar’s weakness, the domestic economy is also adding to the pressure.
He said: “The renewed focus on the local economy has just added weight to the notion that after more than a quarter-century of economic nirvana the Australian economy faces real headwinds.”
McKenna cited a recent speech from RBA Governor Philip Lowe who pointed out that consumers are no longer inclined to increase consumption using borrowed money.
“Now that means he (Governor Lowe) doesn’t see a lot of point in cutting interest rate. But it is also a neat summary of where the RBA, APRA, and the government’s actions have nudged Australian households toward,” McKenna said.
He also pointed out that overall, Australians have plenty of debt already.
“And this I sense is what ails the Aussie dollar at the moment. It’s possible that local and global investors are concerned that domestic slowdown will add weight to the other headwinds and wonder where growth in the economy will come from,” McKenna said.
However, he noted that a falling Australian dollar will go a long way to off-sett this potential weakness.
“I’m now starting to think that is the necessary requirement and the Aussie is headed under 70 cents in the year ahead. Maybe even to 65 cents?”
“With the RBA reluctant to cut (interest rates), the Australian economy increasingly looks like it needs a lower Aussie dollar,” he said.
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