The AUD will continue strength - $1.25 anyone?

You might wonder for how long can the AUD exchange rate sustain its strong rise against the USD. I would suggest that it can do it for a while yet. We might think that the strong $A is going to jeopardise our international competitiveness. The reality however is that:

1. Until recently, the USD was being debased more than the AUD was rising. This is evident against other currencies such as the Philippines peso, a strong Asian market, which is not a significant commodity exporter. It should be, but corrupt/failed state impacts its prospects.

2. The AUD is benefiting from stronger commodity prices, but alas they have tends only to strengthen because of a weak USD, which most commodities are denominated in.

3. The Australian economy is such a commodities export machine sitting on the door-step to Asia, so there is good reason to expect strong export income growth, as well as strong business investment.

4. Australia is a net oil exporter. We must remember that whilst Australia produces little oil, i.e. about 60% of its needs if I recall correctly, it produces a hell of a lot of gas, and conventional and liquefied gas is priced based on an oil reference price, i.e. If there is a Middle East crisis, a lot more energy dollars is coming to Australia. Mind you some of it will be flowing out again as dividends to US, European and Chinese/Japanese/Korean equity partners.

5. These strong exports is driving more investment, which leads to capital inflows, i.e. strong $A.

6. High local indebtedness: The Australian private household is well-geared to property. The Reserve Bank is going to keep interest rates low so that people keep spending. i.e. It wants people spending as much as possible because the domestic economy will be a little weak...mind you unemployment is pretty good. But people will not be confident about the external world. But interest rate rises will probably depend on if housing turns into a bubble...so there will need to be some increases in prices coming...to cool that market.

It is true that tourism will be hit by a strong AUD, and the government is clamping down on immigration growth. We can also expect some weakness in the broader market thanks to weakness in property. A little weakness in the broader domestic market might actually help to curtail spending. Fears of inflation, problems in the Middle East and the US economy also help.

For these reasons....I think the currency will stay strong.

I just don't see anything negative on the horizon. I don't see China collapsing. High oil prices will hurt Asia more than Western markets, though its probably tensions in the Middle East will probably not impact oil production.

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Andrew Sheldon www.sheldonthinks.com