As risk worries have eased this week, the Australian dollar regained the 90 US cent mark, trading in a 2 cent range over the past few days.
It was another week and another series of ups and downs in the value of the dollar; it’s all really ho hum these days.
Of course, if the dollar was to slump then there would be an outbreak of commentary about drop, most of which would be meaningless.
The current interest is whether the dollar reaches parity with the US currency.
The AMP’s Dr Shane Oliver believes that it will in the next few months; a forecast he had on the table now for some months.
This week’s interest rate rise and the 4th quarter of 2009 growth figures confirm there’s nothing in the economy to undermine the currency, but plenty there to force it higher, especially as resource income rises from April 1 when coal and iron ore contracts are re-written.
Some sort of resolution of Greek’s financial problems would take pressure off the euro, refocus the market on the US dollar, and possibly help the Aussie higher.
The dollar traded around 90 US cents overnight Thursday.
A Commonwealth Bank executive yesterday forecast a cash rate of 5% by the end of the year (the same as the AMP and others) and 5.5% by the end of 2011.
CBA vice-president Madeleine Bertelli told a Committee for Economic Development of Australia briefing yesterday the bank saw the Aussie dollar around 88 US cents by June and 85 cents by the end of this year.
The currency has emerged as THE single most important factor in absorbing the shock from both the surge in 2007-09 in our terms of trade, and then the sharp fall in late 2008 and early last year as the credit crunch hit and recession dragged world growth lower.
Perhaps the biggest impact of the floating dollar has been in the way it has helped ease inflation, as Reserve Bank Deputy Governor, Ric Battellino explained in a speech last month
"In the current episode, with a floating rate, the behaviour of the nominal exchange rate has been very different from the past. It has risen early in the boom and by a large amount. This has been an important factor helping to dissipate inflationary pressures.
"In the 30 years since the previous boom, the Australian economy has developed in ways that should make it better able to accommodate the surge in mining activity that is currently under way.
"The floating exchange rate is a key difference, but goods and labour markets are also more flexible, and the monetary and fiscal policy frameworks are now more soundly based.
"This gives grounds for confidence that we can do better this time, but the task will not be without challenges."
Challenges are always there, this time it’s how to manage the returning mining boom without being caught up in an inflationary surge as we were in 2007.
The national accounts also suggest, quite strongly, that growth will accelerate, and rates will rise when the RBA sees the need and fears about the budget deficit and federal debt are overblown.
The AMP’s Dr Shane Oliver sees the 2010 budget deficit coming in around $38 billion and not the $57.7 billion estimate from Treasury last November.
That will drop the percentage of GDP to around 3.3%, from the 4.5% a lot of forecasters have been using.
If the economy grows at 5% (nominal) or more (that’s around 3% real and inflation of around 2%-2.5%) and the government holds spending to 2% real, then the deficit will be cut again in 2010-11, especially with a surge in taxes expected.
Commodity export revenue is projected to rise by $27 billion next financial year: the terms of trade have already bounced back sharply, rising 4% in two quarters after falling around 16% in the space of nine months.
All this is positive for the dollar, and means a host of companies that have had revenue and earnings clipped, face continuing pressure over the next year or so.
In its March commodity outlook, the Australian Bureau of Agricultural and Resource Economics (ABARE) projected the Aussie dollar to trade around 88 US cents for the near future.
"The Australian dollar appreciated significantly both against the US dollar and on a trade weighted basis during the second half of 2009, before a partial reversal in early 2010," ABARE said.
"For the first eight months of 2009-10, the Australian dollar is estimated to average around US88c and TWI 68. This compares with US75c and TWI 60 in 2008-09.
"The recent appreciation of the Australian dollar appears to reflect a number of factors, including the improved outlook for global economic recovery, robust economic performance of Australia’s major trading partners in emerging Asia, particularly China, and stronger growth in the Australian economy relative to other major OECD economies.
"Changes in financial market sentiment toward the US dollar appear to have also affected the recent movements in the Australian exchange rate.
"As the world economic outlook improved, financial market sentiment toward the US dollar as a safe haven appears to have retreated and weighed on the value of the US dollar, which has been declining against many other major international floating currencies.
"In the short term, the value of the Australian dollar is assumed to remain relatively high.
"There are a number of reasons underpinning this assessment.
"First, the assumed global economic recovery in 2010 and 2011 is expected to provide strong support for the demand for mineral resources and, hence, Australia’s minerals and energy exports.
"Second, Australian interest rates may rise more rapidly in t
