will the aussie reach parity with us dollar?

Headline article on CNBC below!

Advantages of AUD appreciating against USD for CER explained on here previously.

http://www.cnbc.com/id/33204323#

Will the Aussie Reach Parity with the US Dollar?
Published: Wednesday, 7 Oct 2009 | 4:47 AM ET Text Size By: Reuters
The Australian dollar, the best performer this year among the world's most traded currencies, may test post-float highs in coming months, and perhaps even parity against the U.S. dollar, as a host of factors push it higher.

They include a resilient local economy, a recovery in the world economy and commodity prices, rising local interest rates, a pick-up in risk appetite and a slump in the U.S. dollar.


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Add to that the excitement around the Reserve Bank of Australia's move to raise rates by 25 basis points to 3.25 percent on Tuesday — the first among G20 central banks — and the Aussie, already a darling of currency speculators, may find itself even more sought after.

The Aussie [$$AUDUSD 0.8936 0.0036 (+0.4%) ] hit a 14-month high of $0.8920 on Wednesday.

To Hit Parity or Fail Again?

Parity with the U.S. dollar is a mark of international standing for Australians, a coming of age for a currency long known as the "little battler" for the pounding it took after it was freely floated in 1983.

The Aussie came close to parity in July last year at $0.9851, also it highest level since being floated, but the global credit crisis and resulting world recession put paid to that.



It cratered to almost 60 U.S. cents in October as investors fled to safe-havens but has rebounded past $0.8380, a 61.8 percent Fibonacci retracement of its July-October 2008 plunge.

Crucially, it has maintained an upward trend channel for nearly eight months. If that continues, it would hit parity in early December or the end of January at the latest.

Yet, few analysts are predicting parity, even though they expect the Aussie to climb well over $0.90 in coming months. Westpac has a three-month target of $0.95. They say market sentiment is now weaker that it was in July 2008, when it came close to parity.

Before the crisis, commodity prices were at record highs and most investors thought the world economy was in great shape. Huge interest in the yen carry trade also kept the Aussie aloft.

Commodity prices are recovering but are well below their peaks. The Reuters-Jefferies CRB index is 46 percent off a record high. The worst of the global slump seems to have passed, but the outlook for the world economy is unclear.

Recent data has raised concerns, especially in the United States, of a set back in recovery. Carry trades have not regained their shine. A broad slump in U.S. dollar has contributed to the Aussie's strength.



The U.S. dollar index is resisting a convincing break below 76, raising the chances it will bounce back. The prospect of tighter global monetary policies next year will leave investors with less cash to invest on the one hand and more choices on where to invest on the other.

The Aussie may retreat in 2010, some analysts say. "There would be some kind of correction next year. I don't think it's going to be a one-way traffic," said John Kyriakopoulos, a strategist at National Australia Bank.

Aussie bulls argue that battered western economies are a lot less relevant for Australia these days as they have been supplanted by China and India, where huge demand for resources would keep Australia's commodity sales afloat.

Would Parity Hurt Australia's Economy?

Not necessarily. A rising Aussie shrinks the profit margins for exporters, who produce a fifth of GDP. Yet, one reason for the Aussie's rise is the recovery in commodity prices.

A stronger Aussie also reins in imported inflation, holding down prices for the benefit of the consumer.

Slideshow: Central Banks Report Cards
The central bank noted the Aussie's strength in its October policy statement, but it has otherwise appeared sanguine about its gains.

Will the Central Bank Intervene?

Unlikely. The RBA has said before it only tries to influence the value of the Aussie when it is not in line with fundamentals, or when markets are disorderly.

That said, the RBA regularly trades the Aussie in currency markets to replenish its reserves, and has been shrewd about such deals.

It sold a record amount of the Aussie in June when the currency was at nine-month highs, and made over A$4 billion profit into the bargain.

The RBA said that was not intervention, though some investors disagreed. In any case, the sale barely crimped the Aussie's rise longer term.

What's the Aussie's Fundamental Value?

The RBA and most private-sector economists have varying estimates of the Aussie's value based on economic fundamentals.

Yet, the concept of "fair value," though interesting in theory as it shows whether a currency is overbought or oversold, is far less meaningful in practice as currencies can stray from their "fundamentals" for a long time.

The yen's rise since the 1990s, for instance, has baffled many given Japan's ailing economy.

Many economists estimate the Aussie's fair value right now to be roughly between $0.75 and $0.85, but forex traders care little about such concepts. To them, momentum is what matters.