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 MARKET REPORTS |
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Economics
Australian Dollar - to parity in 2008
January 9, 2008
Clifford Bennett, Chief Economist, Sonray Capital Markets
The major up-trend of the Australian dollar is expected to resume this year, and yesterday’s building approvals data may be the catalyst for a sharp run to the upside. There is likely to be little respite for exporters, with parity a definite chance in 2008 as previously forecast.
Australian Building Approvals data, up 8.9% in Nov, is bringing the market’s focus back toward the fact that the Australian economy remains in fine form, and the Reserve Bank of Australia may have to hike rates again, probably in February, even though the Fed will be cutting rates.
The constant background for all markets at the moment is a US economy flirting with negative growth, and a US dollar that remains in decline. Given the negative environment for the US dollar, and the still expected to be maintained strong Asian and global non-US environment, the commodity exporting Australian dollar is likely to remain in high demand. Add in the high yield, likely to get higher, and a fresh federal government, and you get an extremely bullish Australian dollar fundamental picture.
While many have been forecasting a recovery in the US dollar this year, the realities of the US deficits, political paralysis, and an economy is crisis mode, mean the US dollar is still over-valued at current levels. As global fund managers and institutions, including central banks, continue to recognise the on-going demise of the US dollar, global portfolio weightings will continue to diversify to currencies such as the Euro, and even the little
Australian dollar.
The last year or two has for the first time seen a shift toward Australian dollar buying that is long term and entrenched in nature, as part of major global investment portfolios. This is a very different experience to the “hot” money investments of the past which would be quickly reversed at the first sign of trouble. We continue to see the past panic type sell offs as decreasing in intensity, due to the higher quality longer term nature of Australian dollar buying now being seen. Subsequently, against a falling US dollar, the
Australian dollar has extreme upside potential, and this is why parity to the US dollar is still our forecast for this year, 2008.
It is crucial to recognise that Australian dollar strength is a function of a long term historical price shift lower in the US dollar, and at the same time the ascendency of China and the Asian region toward becoming the world’s dominant economic region. The Australian dollar is permanently revaluing toward parity to the once mighty, but now fallen, US dollar.
Key Forecasts:
- Fed will cut three times by 25 points in 2008.
- US economy will flirt with negative growth Q1, Q2.
- US equity markets remain at risk near term.
- China to remain a powerhouse.
- Global economy to remain firm.
- Commodities volatile but bullish.
- Gold target at US$495, US$800 achieved, US$1100 next.
- US dollar to continue accelerated collapse over next 6 months.
- Carry trade is old news and over, USD/YEN to decline to 103, 97.
- RBA to raise rates to 7.25% in H1 2008.
- Australian dollar will continue to climb, 93 cent target achieved,
next parity $1.00, but in 2008, then 1.08 1.12 in following year.
- Global equity markets may suffer minor drag from US market
weakness occasionally, but remain strong.
- Australian equities increasingly aligned to global growth. 6,900 7,350 in 2008.
More articles from this edition of CompareShares:
Trader profile: Life as a full-time trader – Fay Benjamin offers her survivor tactics
Stocks: A stock for a lifetime
Resident Trader: 2007 was a good year to trade Aussie microcaps
Investing: Rivers of cash from sovereign funds to impact equity and currency markets
Smart Investing: Early retirement - dreams versus realities
Expert Panel (Futures): Ask the expert - how do I predict commodities prices?
Forex: Australian Dollar - to parity in 2008
Housing: Recovery emerging in housing sector
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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