Investors should expect the Australian dollar to face “global scrutiny” and “material downward pressure” should conditions in Australia’s housing market continue to deteriorate, JP Morgan’s head of FX has said.
In comments reported on Friday by the Australian Financial Review, JP Morgan’s head of foreign exchange, Paul Meggyesi, suggests that the RBA may at some stage need to go it alone on monetary policy—cutting interest rates at a time when other central banks are standing still or increasing rates—leading to “material downward pressure” on the Australian dollar. The RBA will need to tread this path, Meggyesi believes, if the rapid rate of decline in Australian house prices continues unabated.
“Australia is one of the few countries where you can make the case that there’s an independent macroeconomic story that is gestating here.
“There is nothing that really drives an independent monetary policy cycle or an independent repricing of the exchange rate more than a housing market crash,” he says.
Like most others in the market, Meggyesi accepts that we’re still some way ahead of a complete housing disaster in Australia, but it is hardly comforting when month after month records continue to be broken, in a bad way.
On Friday, it was announced by property data provider CoreLogic that Australian home prices had fallen for the seventeenth consecutive month in February, and that homes in Melbourne were falling at the fastest annual rate ever recorded, at 9.1 percent. Sydney homes are falling at an even faster rate of 10.4 percent—the fastest rate of decline since 1983.
Deterioration in Australia’s housing market has not been lost on investors. The Australian dollar was the worst performing major currency in 2018, losing a hefty 10 percent against the US dollar. It’s hardly been a sprightly start to 2019 either: on-balance, the Aussie is flat on the year, even though other major currencies have had cause to stutter themselves, and it failed to hold US71¢ on Friday as it slipped for a third consecutive day and second consecutive week.
“There is definitely scope for the Australian dollar to come under broader global scrutiny if the housing market does continue to weaken in a way which then does start to feed back to the economy,” Meggyesi says.
Under those conditions, “it will be an independent easing cycle for the RBA and that will be likely to put material downward pressure on the Australian dollar.”
Even without RBA cuts, Meggyesi is forecasting further Aussie depreciation by year-end. Come 2020, the currency is likely to be worth only US68¢, he says.
JP Morgan’s forecast is at least an improvement on those offered earlier this year by HSBC (US66¢) and Capital Economics (US60¢). Both groups also cited the housing market among reasons to be bearish on Australia’s currency.