perhaps the most aggressive forecaster of its decline. The
Australian dollar had been trading at 80¢ and looked to be on its
way to 82¢ and then 85¢—and, indeed, this was my initial forecast.
Then I realized that the true fundamentals, as opposed to
the consensus fundamentals, painted an entirely different picture.
Because of continuing high trade and current account
deficits and the significant moderation in interest rate levels, it
was highly likely the Australian dollar was about to move into a
major long-term price decline. Generally, high interest rates relative
to other countries lead to an inflow of (albeit short-term)
overseas investment. This offsets the trade deficit and produces
an appreciating currency—even while the otherwise fundamental
vulnerability of the currency due to the worsening trade
performance continues to grow. Once interest rates moderate,
the currency is left highly exposed. This process is frequently
repeated in currency markets and has been one of the main
drivers in the fall of the once mighty U.S. dollar in recent years.
Back in the late 1990s, while I did not immediately change my
forecast for the Australian dollar, I did send out an advance
warning to clients that there was an alternative perspective to
the still-favored bullish outlook. By studying long-term price
behavior and patterns, I thought that should the Australian dollar
move below 78¢, it could signal that it was about to collapse.
When the dollar fell, against consensus expectations, through
78¢ I already knew what this could mean and how far the currency
could decline. At this point I began to practically scream
from the rooftops that the Australian dollar was on its way to 68¢
or even 65¢. This was considered a wild call, and even clients
who usually followed my advice to the letter began to doubt my
ability. As the dollar tumbled lower—to a lack of reaction, or
stunned inaction, from most market participants—it became
obvious that my first forecasts were actually too conservative.
The dollar would be going even lower. I was the first to predict
a level of below 60¢ for the Australian dollar, and then to finally
forecast a 48¢ low with risk to 45¢. While the 45¢ prediction got
more publicity, the central target of 48¢ turned out to be quite
accurate.
When I first started predicting that the Australian dollar
would fall to 60¢ and eventually the 48¢ low, my forecasts were
front-page news, especially in the business sections of major Australian papers.
Yet the view was so contrarian that the managing director of the international
investment bank I then worked for sat on my desk with a copy of the newspaper in
which my predictions were quoted and simply said, “You had better be right.” It
is not easy to go against the headwinds of consensus; however, it
is often the most lucrative tack, as it suggests everyone else is the
other way and will have to turn if they are wrong.
Read More: A Contrarian Position on the Australian Dollar
