Aussie Dollar cheer squad may hurt our economy...

The Australian economy is likely to slow over the next year or two as the mining boom fades and it is articles like this one which may deepen the slowdown.

During the last Asian crisis, Australia did not have a recession. A large part of the reason for this is the great Australian safety net - our floating exchange rate.

In 1998 during the Asian Crisis, the Aussie Dollar dropped from around 80c to around 50c. In the GFC, the dollar dropped from around 93c to around 63c. This time around, we may not be so lucky as we are one of the few remaining AAA rated countries in the world and our dollar may not be the perfect shock absorber it has been in the past. This could hurt our slowing economy.

Our opinion is that the slowdown in China has the makings of a much bigger crisis than the 1998 crisis and the dollar would need to fall further to cushion the economy. If this does not happen, then the dollar sensitive industries like tourism, manufacturing, agriculture and even mining are going to have some very stiff headwinds. This could be quite painful.

We do not know exactly what is going to happen, but with the Aussie Dollar cheer squad still out in force and limited places for pension and insurance companies to invest to keep their average credit ratings up, the probabilities of the Aussie staying higher for longer and further damaging our economy is increasing.

Those that believe that the Aussie banks are the ultimate investment should perhaps factor into their thinking the possibility that our unemployment starts to rise higher than many are predicting due to the higher Aussie dollar.

At Valor Private Wealth, we would feel uncomfortable holding the Australian banks at even half their current prices if this possibility eventuates.