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Doctor of chiropractic, part-time macro analyst, and currency trader.
  • Aussie Dollar Parity A Question Of When, Not If 0 comments
    Sep 26, 2010 1:21 PM | about stocks: RBA

    The Australian Treasury said on Friday that it expects to see the economy reach full capacity and that there will be a strong income boost from a “soaring” Terms of Trade in the year ahead, both of which are likely to pose inflation risks.

    Importantly, the Treasury believes this scenario will materialize despite the expected withdrawal of fiscal and monetary policy (i.e. increased interest rates from the RBA). But what it said about expectations regarding exchange rates was even more interesting:

    “Tighter fiscal policy, and measures to boost labor force participation and productivity, could play a useful role in complementing monetary policy, reducing the size of the required increases in interest rates and the exchange rate,” it said.

    While this does not mean that Australia will intervene in order to strengthen its dollar, they certainly will not do anything to prevent its appreciation going forward because a higher exchange rate will be “required” even if fiscal policy is reduced.

    Glenn Stevens, Governor of the Reserve Bank of Australia, said on September 20 that rate of economic growth is likely to be “above trend” in 2011 and as a result, traders now see a 29% chance of a rate increase at the next RBA meeting on November 2.

    The risks to this outcome are a double dip in the U.S. and a slowdown in the Chinese economy. But the chances of seeing this have diminished somewhat; in fact, the most likely outcome is to see continued below trend growth in the U.S. and a “soft landing” managed slowdown in China followed by a renewed acceleration.

    If anything, the Fed’s promise to restart Quantitative Easing, if necessary, will only serve to fuel the trend of a rising Australian dollar. Indeed, with a potential supply increase of U.S. dollars and what looks to be like a sure decrease in the supply of Australia’s currency, parity for AUD/USD seems certain to be only a question of “when” and not “if.”

    Disclosure: Long AUD/USD
    Stocks: RBA
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