How Low Can The AUD Go?

Gold continued to track sideways this week, hovering around the USD$1,200 area where it seems to be holding support. A low of $1,186 occurred mid week but a quick recovery sees the battle for the $1,200 level still ongoing. Silver had a sharp bounce off of critical support, which sits at USD$14.00, with upside targets of $15.20 to $16.00 in sight, and the Gold/Silver Ratio dropped from 85 to 82.
 
We talked in previous market updates about the potential for silver putting in a bottom at USD$14.00 and we have had the first sign of this as the price recovered with a bounce to $14.60 this week. It’s too early to call for sure, but an encouraging bounce nonetheless. The daily silver chart below shows area of support and a recovery from very oversold levels this week.

AUD Side Continues

Domestically, we continued to see the AUD being sold off as we slide through the lowest point of 2018, which sat around $0.7085. This resulted in gold and silver prices for Australian investors being higher this week at AUD$1,685 for and AUD$20.70 respectively at time of writing.
 
The RBA is showing little to no interest in raising the official cash rate any time soon and with the diverging policies of the Federal Reserve and RBA set to continue, the AUD trend remains to the south as seen below. Good news for those comfortably hedged with some precious metals in their portfolio.

Source: DailyFX

So the question arises – how low can the AUD/USD go?
 
A continued grind lower, as the RBA is left behind with rates rising globally, could see the AUD all the way back to GFC lows of $0.60 - $0.63. But we should first see next major support coming in at $0.682, which was the January 2016 lows.

Prepare to pay more at the petrol bowser, as the currency loses purchasing power, whilst oil prices are on a rampage. Inflation in general should see a pick up in coming years, and this won’t help the purses of Australians loaded up on housing debt, with little to no wage growth.
 
Brent crude continued to rally this week hitting a new four-year high, with the chart below providing probably the best argument to start looking at a Tesla.

Pimco Joins the Bearish Party on Property

Investment Manager Pimco is the latest to join the ever-growing bandwagon of analysts that have turned bearish on Australian property prices and Aussie banks, stating “The probability of a market-moving agency downgrade that causes major banks to lose their AA- rating for the first time in history is now higher than before.’’ (Source: Bloomberg)

Pimco estimates that a 2% increase in mortgage rates could lift borrowers’ repayments from 38% of their pre-tax income to close to 48%, which would see housing affordability worsen to levels last seen in the global financial crisis.
 
That’s pre-tax income, not disposable income, so Australian households have seen their savings ratio drop dramatically, and are already feeling the pinch with rates around the lowest level ever. Tighter credit and a slower housing market will weigh on household consumption and economic growth in coming years, forcing the RBA into keeping rates on hold for longer, (or potentially fulfilling our contrarian view of another possible cut) which adds to our bearish AUD thesis. 
 
House prices have fallen for 12 straight months now, and we have also seen a big drop in development approvals. Apartment approvals in August dropped a whopping 17.2% from a month earlier. What was only seen as a possibility by the fringe in now becoming reality as the unthinkable is happening in Australia. Property prices are actually falling.
 
When an asset class gets overbought during a speculative bubble, there doesn’t necessarily have to be a specific catalyst to see lower prices. Prices will simply move lower once momentum has evaporated, as it takes the speculative aspect out of the market, and changes the psychology of a large percentage of investors.

Source: Bloomberg

Australian Banks have the highest proportion of their loan booked in residential property (60%) of any other country in the developed world, and more than double the US ratio.
 
A more detailed look of this can be found in a Bloomberg article ‘How Australia’s Banks Became the World’s Biggest Property Addicts’ which can be found here.

Until next time,
John Feeney
ABC Bullion

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