Australian dollar may hit parity in overseas session

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THE Australian dollar may hit parity with the US dollar for the first time in 27 years in its overseas session after hitting US99.8c in trade today, analysts say.

At 1700 AEDT, the Australian dollar was trading at 99.61 US cents, up from Wednesday’s close of 98.46 cents.

Since 0700 AEDT on Thursday, the local unit traded between 98.97 US cents and 99.82 cents.

The renewed rise came as traders awaited a second round of quantitative easing by US Federal Reserve – buying bonds from banks – to inject funds into the financial system to help the beleaguered American economy.

The Australian dollar touched a post-float high of 99.82 US cents at 1340 AEDT on Thursday.

“It was the Euro against the US dollar today that really led the move,” 4Cast economist Ray Attrill said.
“The Aussie has just been dragged higher by the strength of the euro/dollar exchange rate.

“There just seems to be deepening conviction about how aggressive the Fed might be in terms of quantitative easing measures.

“I think that’s still the overriding driver of negative US dollar sentiment.”

Expectations have firmed that the Fed was close to enacting a new bond-buying program, perhaps as soon as November.

The Fed employed the same measure as a tool to combat the effects of the global financial crisis in 2008 and 2009.

Mr Attrill said the local unit would break parity with the US dollar during the offshore session.

“Europe could see the moves that we’ve made with the euro dollar/rate and will probably extend them at some point … and that may be what drags us through parity.”

ICAP economist Adam Carr also said there was a good chance the Australian dollar could reach parity with the greenback during the offshore session.

“We could see it tonight,” he said.
“A 40 pip move is not a lot these days.”

US initial jobless claims will be released in the US on Thursday night followed by the release of important US inflation and retail sales data on Friday night.

At 1700 AEDT, the Australian dollar was at 80.92 Japanese yen, up from Wednesday’s close of 80.61 yen, and at 70.75 euro cents, up from its previous close of 70.57.

The euro finished at 1.4079 US dollars, up from 1.3954 US dollars, and at 114.36 yen, up from 114.23.
The US dollar was at 81.24 Japanese yen, down from 81.86 yen.

But it would appear not everyone will be taking advantage of a cheap overseas holiday with the Australian dollar drawing ever closer to parity with the once mighty US currency.

A new survey released on Thursday showed that many homeowners are ditching holiday plans to help pay the mortgage because of higher interest rates and the likelihood of more increases to come.

The boss of the nation’s biggest home lender – Commonwealth Bank of Australia (CBA) – has also indicated that bank lending rates are likely to increase beyond that of official moves by the Reserve Bank of Australia.

The dollar struck US99.82c on Thursday, its highest level since the currency was floated on the foreign exchange market in  1983.

National Australia Bank currency strategist John Kyriakopoulos said he wouldn’t be surprised to see the dollar as high as $US1.10 over the next six months, although he has a formal prediction of $1.05 by mid-2011.

He said this comes against the backdrop of a “triple whammy” of the US Federal Reserve restarting “quantitative easing”, a re-acceleration in Chinese economic growth – and hence stronger commodity demand – and the RBA resuming interest rate increases.

Quantitative easing was used by the US central bank during the depths of the global financial crisis, buying up US government debt to increase the flow of money supply into the economy.

“We assume the RBA cash rate peaks at 5.5 per cent in mid-2011 … with the US Fed likely to keep interest rates close to zero all through 2011 and Australia’s commodity prices likely to remain elevated as China’s GDP growth remains strong,” Mr Kyriakopoulos said.

Most economists had expected the RBA to raise the cash rate to  4.75 per cent last week, but instead it left it at 4.5 per cent for a fifth straight month.

But CBA chief executive Ralph Norris said movements in bank funding costs were impacted by more than just what the RBA did.

“There is no doubt when we look at the current cost of funding that rates are going to increase,” Mr Norris told reporters following a business lunch in Sydney on Thursday.

“As I said in my address today, the additional cost of liquidity and the additional cost of capital is going to have an upward pressure on interest rates going forward.”

With mortgage rates about 200 basis points higher than last year’s trough, homeowners are taking measures to shore up household budgets, including downgrading their holiday plans or not taking a break at all.

The latest Bankwest/Mortgage and Finance Association of Australia home finance index found that more than 50 per cent of respondents were giving up a range of everyday necessities to accommodate higher interest rates.

They were taking steps such as eating out less, taking a packed lunch to work, bulk buying food, selling unused items rather than throwing them out, and buying extra lotto tickets.

Another survey showed that consumers were worried about the inflation outlook, which will be a concern to the central bank as rising price expectations can result in demands for higher wages.

The Melbourne Institute consumer survey of inflationary expectations jumped to 3.8 per cent in October, from 3.1 per cent the month before, and well beyond the RBA’s two to three per cent target band.