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Patience Required - Australian Dollar Heading For Parity

A further global relaxation of monetary policy and aggressive Bank of Japan easing will provide an important cushion for the Australian dollar over the next few weeks. Regional concerns are liable to increase, however, with the currency likely to peak in the 1.05 area this quarter and weaken back below parity against the US dollar during the third quarter.

1. The latest speculative IMM positioning data continued to record a substantial net long position, in contrast to the Canadian dollar where positions have switched to a major net short position. The Australian dollar positioning will leave the currency exposed.

2. Confidence in the global economic growth outlook is likely to deteriorate again. Despite the cushioning impact of a more aggressive monetary policy, especially by the Bank of Japan, there will be fears surrounding the regional and global growth outlook.

3. The Reserve Bank will remained poised for further monetary action if required even though the very short-term potential for further rate cuts is limited.

4. The domestic economic data is likely to cause fresh cause for concern. The construction PMI index dipped again to 39.0 in March from 45.6 previously while the manufacturing index also declined for the month.

5. The government faces a Federal Election in September with the Governing Labour Party trailing in opinion polls. The administration will look to boost competitiveness by pushing the currency weaker ahead of the poll.

6. There are likely to be fresh concerns surrounding the Chinese economic outlook. There were slightly disappointing PMI releases for the latest month and the net trend is likely to be for further deterioration as the weight of bad debts within the banking sector start to have a much more serous negative impact and create major barriers to increased capital spending.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.