Pressure is on for Aussie weakness After a brief respite, the Australian dollar is under pressure again. The currency dropped to a three-year low on Monday following the publication of weaker than expected retail sales data. One man hoping the Aussie remains "under the pump" is the country's treasurer, Chris Bowen. He needs a weaker currency and loose monetary policy to support a rebalancing of the Australian economy and deliver a promised budget surplus by 2016. Mr Bowen looks likely to get one of these things on Tuesday. Weak readings on consumer and business confidence and benign inflation is expected to prompt the Reserve Bank of Australia to lower its benchmark cash rate by 25 basis points to a record low of 2.5 per cent. Whether the dollar continues to head south is less clear. The Aussie has dropped almost 15 per cent since the beginning of April as the debate about when the US Federal Reserve will start to taper its bond purchases coincided with a downturn in domestic economic data. Concerns about Chinese demand for commodities have also weighed on the currency. The Aussie, which held near 91 US cents last month, broke below 90 cents last week after a gloomy speech by RBA governor Glenn Stevens, in which he said there were no hurdles for an August rate cut. Mr Stevens also took on a notably more bearish tone when he talked about the recovery outside of the country's mining sector. Concerns about the economy deepened on Friday when the Labor government tore up its three-month-old budget forecasts, predicting slower growth and widening deficits over the next two years. It also announced tax increases and savings measures that Mr Bowen said would help the budget return to surplus by the 2016-17 fiscal year. That put further pressure on the currency. "With the terms of trading falling on the back of weaker commodity prices [export prices compared to import prices] and the domestic economy struggling as the mining boom fades, I think the dollar will head towards levels that reflect relative prices," says Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney. "If you do a purchasing power parity calculation on the Australian dollar, you end up with something between 75-80 cents as fair value," he adds. Historically, the dollar has acted as a shock absorber for the resource-rich Australian economy, cushioning the adverse affects of slower growth. But for the past couple of years it has remained at or above parity with the US dollar even though commodity prices and interest rates have peaked and global growth has slowed. A key factor in keeping the dollar high during this period, according to economists, was the outperformance of the Australian economy on the back of continued high levels of mining investment. Another was the large rounds of quantitative easing in the US that flooded markets with liquidity and triggered a global hunt for yield. However, those props are slowly being eroded, says Mr Oliver. With the US economy looking a bit stronger and talk of tapering by the Fed, you can argue the Aussie is going back to levels that better reflect fundamentals. These "fundamentals" include rising unemployment, weak business confidence, inflation at the lower end of the RBA's target range and the start of what could be a sharp downturn in mining investment. "If the RBA keeps cutting rates and bond rates converge toward US levels, then there are fewer reason for investors to hold Aussie dollar debt," says Greg McKenna, founder and chief strategist at Global FX. But with a record number of traders betting against the Aussie, Mr McKenna believes the currency could find some short-term support. Indeed, after hitting a three-year low of $0.8846 on Monday, the Aussie recovered to trade at $0.89 cents. "Every man and his dog is short at the moment," he says in reference to the latest Commitment of Traders report from the Commodity Futures Trading Commission, which show that last week, net shorts - the number of speculative bets on the currency moving lower minus those betting on it moving higher - reached a record high last week. The speculative market is mega short; there's not a lot of positioning space. And there are other reasons to be positive, says Robert Rennie, chief currency strategist at Westpac. "We have been questioning the speed of tapering by the Fed, and Friday's US payrolls really added to that," he says. Mr Rennie also believes the market has become too negative on the China commodities story, pointing to recent guidance from iron producers BHP Billiton, Rio Tinto and Fortescue Metals Group. In 2009/10 Australian iron ore exports were annualising at 340m tonnes. It's currently 540m and set to hit 660m next year. That's a significant shift up. However, even those who are mildly positive on the Aussie concede the domestic situation in Australia simply cannot be ignored. Or, as Mr Stevens put it in another recent speech: "If the economy "needs" a low exchange rate, it will probably get it." And all the recent data suggests Australia needs a weaker currency to stimulate growth.