Russell Investment Group’s market barometer released yesterday points to a lifting of the A$ against the US$ as it continues to be driven higher by the increasing US current account deficit.
According to Sydney-based Russell investment strategist Andrew Pease, there is still upside potential in our dollar with the biggest influence being the pressure on the trade-weighted US$.
“The US current account deficit puts downward pressure on the trade-weighted US$, the bias for the A$ will be upwards, regardless of the direction of commodity prices and interest rate differentials,” Pease said.
Normally we think of the A$ being driven by commodity prices and interest rates, but the traditional relationship between the dollar and commodity prices broke down in 2000 during the tech boom, Pease said.
“However, right now, the A$ looks cheap relative to where commodity prices are but quite expensive where purchasing price parity (PPP) is concerned.”
Russell calculates the PPP to be US69 cents, which makes it expensive at US78 cents. This is in comparison to US$1.10 for where it would be if the traditional relationship with commodities still existed.
“Even though the A$ is expensive by PPP standards, the potential for further US$ weakness implies an upward bias for the A$,” Pease said.
