Aussie 'peso' a standout loser

"Australians have a fondness for nicknames," saysJosh Noble in the FT, and the latest target is the Australian dollar or the Australian peso, as some are calling it. The Aussie dollar has been "a standout loser" lately, dropping by 12% against its US counterpart in six months. It currently buys around 75 US cents, the lowest figure for six years.

The main reason for the trend is China's cooling appetite for raw materials. China's proportion of Australian resource exports such as iron ore and coal soared from 8% in 2002-2003 to 52% ten years later. Mining's share of Australia's GDP doubled over the same period and the decade-long boom prevented the economy falling into recession during the global financial crisis. But as China has curbed its credit-fuelled investment bubble, demand and prices have slid. The resulting slowdown in the Australian mining sector has spread across the economy as mining services, construction, investment and income growth have cooled.

There seems little chance of another sector taking up the slack. Non-mining industry was weakened by the strong dollar during the boom years. And consumers aren't in a position to go on a massive spree. Unemployment has crept back up to its financial crisis peak. Household debt has hit a new record of 154% of disposable income, one of the highest ratios in the developed world. Worryingly, Australians have continued to load up on mortgage debt, which has further inflated the house-price bubble. The mortgage debt-to-income ratio has also surpassed its pre-crisis peak it is around 140%.

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No wonder, then, that the central bank, the Reserve Bank of Australia, recently trimmed its 2015 GDP forecast to 1.75%-2.75%, from 2%-3% forecast last November. Further interest-rate cuts to prop up growth are being pencilled in. Lower growth and rate cuts are always bad news for currencies. There is also the added complication that the housing-market bubble could get even bigger, increasing the odds of a sharper consumer slowdown in future if it bursts. The upshot, says Morgan Stanley, is that the Aussie is set for further falls. The bank thinks that by the end of next year it may only be able to buy 65 US cents, a slide of another 13% from current levels.