Wednesday, October 03, 2007

Standby for the $US1 Australian dollar.

“What may have appeared far-fetched at the start of the year can now seriously be contemplated." - Craig James

"Parity is just a number that happens to be around 12 per cent from current levels." - Stephen Koukoulas

Currency traders are bracing themselves for an Australian dollar worth more than 90 US cents and, within months, more than one US dollar.

As traders digested the implications of the Aussie’s extraordinary 8 per cent rise against the US dollar in the last month the currency took a breather in Australian trade yesterday, slipping back one US cent to 88.20. On Monday it hit a high of 88.50.

The chief equities economist at CommSec Craig James said the Aussie was destined to enter the “nervous nineties” and could conceivably reach parity against the US – a feat not achieved since 1982...

He said the Aussie had been the seventh strongest of the 120 major currencies against the US so far this year and attitudes would change.

“What may have appeared far-fetched at the start of the year can now seriously be contemplated,” he said.

“The greenback continues to fall from favour, the Australian economy is rock solid and China’s voracious demand for raw materials continues to boost demand and prices for commodities.”

“The important point is that – baring policy mistakes – China is still in the early days of its industrialisation and destined for a decade of near double-digit economic growth. It is not unrealistic to believe that the Aussie dollar will continue to appreciate.”

At the currency trader TD Securities the global strategist Stephen Koukoulas sent clients a note headed “Why the Aussie Dollar is on track for parity with the US Dollar”.

It said that parity was “just a number that happens to be around 12 per cent from current levels”.

He expected it mid to late next year, after two more rate hikes in Australia had taken the Reserve Bank’s cash rate to 7.00 per cent, well above the US Fed funds rate, which was cut to 4.75 per cent last month and might be cut further.

Australia along with New Zealand already had just about the highest interest rates in the world. As the gap with the rest of the world widened further more money would move to Australia and away from the US to take advantage of the differential.

Inflation was “being unleashed and the labour market pressures would only get tighter” forcing the Reserve Bank to increase interest rates perhaps as many as three more times in the year ahead to lift the cash rate above 7.00 per cent.

The Reserve Bank Governor Glenn Stevens had already indicated that Australia’s economic boom was without modern precedent telling a parliamentary committee that Australia had enjoyed “a rise in the terms of trade of 40% over four years – that is eight per cent of GDP of extra income”.

Non-farm GDP was expanding at its fastest pace since 1994.

“With dwelling investment poised to pick up, government demand sustaining an above trend growth rate on the back of necessary infrastructure spending and some pre-election largesse, household consumption running hot and maybe even net exports moving to positive in the near term, GDP growth is likely to remain skewed very much to the high side,” Mr Koukoulas said.

A literal interpretation of the historical relationship between Australia’s terms of trade and the Australian dollar suggested the dollar could climb to “a level in a $US1.10 to $US1.20 range.”

The Treasurer Peter Costello yesterday welcomed the 18-year high in dollar saying “most Australians will think to themselves that is good because when they travel overseas that will give them better value for money.”

However he added that it would make life harder for our exporters.

“It is a very mixed thing, just another thing that we will have to cope with in economic management,” he said.