China could send Aussie dollar to 50c

THE Australian dollar could slump to US50c within three years should China ramp up efforts to devalue its currency and curb demand for our ­commodities, fresh analysis suggests.

Chinese President Xi Jinping. Picture: AFP

THE Australian dollar could slump to US50c within three years should China ramp up efforts to devalue its currency and curb demand for our ­commodities, fresh analysis suggests.

And with both nations grappling with ballooning debt ­levels, the Reserve Bank could be forced to keep interest rates lower for longer to help ease the burden of repayments, in turn applying further downward pressure on the dollar.

The Aussie has traded in a wide range over the past couple of decades, having briefly dipped below US50c at the start of the millennium only to power past the greenback in late 2010, remaining above parity for 2½ years.

At about US75.5c now, it has fallen almost 40 per cent since 2013.

However, according to Erink Norland, a senior economist at futures exchange CME, it would be wrong to ­assume its bear market is ­nearing an end.

“Given Australia’s dependence on the export of raw ­materials to China and the country’s rising debt burden, we wonder if the Australian dollar risks retesting its lows of around US50c this decade,” Mr Norland said.

The currency’s fortunes were heavily linked to commodity prices such as iron ore, he said.

Shipments of the key steelmaking ingredient helped to sustain the economy through the financial crisis thanks to a seemingly insatiable demand from top ­trading partner China.

But China went on a “phenomenal” credit binge to fuel the housing construction boom that gobbled up those mountains of Aussie iron ore as its President Xi Jinping sought to boost economic growth ahead of his reappointment earlier this year.

“This may be coming to an end soon to the likely detriment of commodities and the Australian dollar,” Mr Norland said.

China’s currency, the renminbi, is “substantially overvalued” against the greenback compared with its peers in ­developing economies and might need to fall about 20 per cent more to stay competitive, he said.

“In August 2015, when China devalued the renminbi by 4 per cent, the Aussie fell 6 per cent against the US in the following days.”