GUEST ARTICLE: The Australian dollar continues to rise and many pundits are predicting it will soon hit or even pass $US parity. Tim Hewson from Raboplus discusses where the Australian dollar might be headed.
After the Australian dollar recently touched a 25 year high of US$0.9849, trying to pin-point how high the Australian might go ultimately depends on who you ask and how they feel on the day.
Maybe the more pertinent question is whether the US dollar has been oversold?
Well, if you asked the Yankees, they are likely to say the US has been hardly done relative to historical levels.
More importantly, it’s not what they think that really counts – it’s their major trading partners who determine the value of the USD. And as far as I can tell, there may be worse to come for the US economy. Especially since they refuse to accept that they are already in recession!
The AUD has largely performed well because of strong demand for Australian commodities, high employment, solid economic growth as well as strong consumer demand and business growth.
Add to this our rising terms of trade and obvious de-coupling from the US interest rates and these later factors generally support continued (but moderate) AUD strength.
So what are the factors that will potentially cause the demise of the AUD?
Continued tightening of domestic monetary policy could result in further reduction in consumer spending, business growth and inflation. If so, the relative strength of the Australian economy and a narrowing of the interest rate gap between the US and Australia will tend to drive the AUD lower.
There is also the very unlikely possibility that the US may defy further recessionary pressures. If so, it’s likely the USD will quickly regain lost ground and see the AUD move into the lower USD$0.90 range.
Let’s assume growth China and the other emerging markets continue to slow. If so, Australia will lose its financial crutch and likely result in a reduction in commodity pricing pressures and result in a fading demand for the AUD.
Speaking with those active in the domestic currency markets, they generally feel there is still a definite sense of optimism. And most believe that a more reasonable trading range is USD$0.91 to USD$0.98 over the next 12 months.
Supporting this viewpoint is a buoyed and resilient domestic market riding the commodity price-linked coat tails of a continued emerging market driven global economic growth that is unlikely to significantly slow in the near term.
Continued terms of trade strength, the very real possibility of the US slipping into recession, further decoupling of the US and Australian interest rates and a well managed slowing in the Australian economy all add to the melting pot for good measure.
Only time will tell if the currency is in for a bumpy ride. And whilst there is no doubt that the AUD is well above its long-term average, it appears it’s a question of when, not if, the AUD will start to retreat to fair value levels despite the obvious relative strength of the Australian economy.
This article was written by Tim Hewson, Senior Manager – Investments and Managed Funds, International Direct Banking at Raboplus
Tim has more than 12 years experience working in banking and financial services including Raboplus, specialist boutique investment firm Absolute Capital Limited and the Commonwealth Bank of Australia.
You can read more articles by Tim at his own blog, Confident Investor where he discusses topical financial issues and at the Raboplus Investor Centre where Tim writes a monthly hot tips column giving his opinion and commentary about investing and what’s happening in the market.
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