VISTING Australia on business I am astounded at the cost everything. For an American, Sydney is now as prohibitively expensive as Zurich. A simple cup of coffee and a mineral water cost more than $12 at any sidewalk café. The high cost of living is a testament to the Aussie’s strong appreciation over the past few years.
This week the sense of optimism has been badly shaken down under, as the Australian dollar has slipped deep below parity, sinking to fresh nine month lows. Australians are wondering if the party is coming to an end. It is hard to predict, but in my opinion the downside risks now are certainly greater than the upside potential.
The Aussie, as I have noted many times in the past, is the poster child for global growth. If global GDP expands at 2.5 per cent rate or better in 2012, then the currency will skyrocket once again challenging it’s all time highs of $1.10. However, recent the economic data across the world is increasingly pointing to a slowdown and perhaps even a contraction in all the major regions of the world. Europe is hobbled by the nagging credit crisis in the periphery, while US growth is hampered by austerity measures and tepid end user demand. All of this doom and gloom may spill over into China, proving disastrous for the Australian economy, which has become completely intertwined with Chinese demand. The connection between the two countries is so close that last week the RBA opened a satellite office in Beijing to better monitor economic conditions on the ground. Meanwhile local newspapers are replete with stories of how Australian farmers are now planting to the Chinese food cycle as China becomes the primary export market for Australia’s crops.
All of this leads me to conclude that Australians may be too complacent about the Aussie’s prospects in 2012. A poll of local analysts revealed that the lowest call for next year was for $0.9300, but I believe that Aussie can fall much farther than the market consensus, perhaps even below the $0.8000 figure if growth slows to a crawl next. year.