Oliver's Insights - US dollar breaking down, Australian dollar breaking higher
30 March 2011 - This note looks at the outlook for the Australian dollar (A$).
The key points are as follows:
- The A$ is continuing to push further above parity against the US dollar (US$), reaching a 29-year high. This reflects a combination of strong commodity prices, US$ weakness and high Australian interest rates.
- Unless the global economy slides back into recession, which appears unlikely, the A$ is likely to average above parity over the next few years on the back of strong commodity prices and relatively high Australian interest rates. Expect US$1.10 by year end.
- The strong A$ will likely cause more pain for internationally focussed Australian companies that don't have a natural hedge in the form of higher commodity prices like resources companies do. However, on balance a strong A$ is positive for the Australian economy, and is part of the adjustment made necessary by strong demand for Australian raw material exports. It's worth bearing in mind that strong and successful economies tend to have strong currencies. If a weak currency was the way to permanent prosperity then Bolivia and Zimbabwe should be topping the world per capita GDP tables, which they clearly do not!
