Oliver's Insights – The Australia dollar, US dollar and commodity prices
This note looks at the resurgence in the Australian dollar, which has now recovered almost half of its global financial crisis driven slump. The key points are as follows:
- The rebound in the $A reflect a combination of renewed $US weakness, stronger commodity prices and the relative strength of the Australian economy.
- Notwithstanding contract prices for iron ore and coal which always lag, tradeable commodity prices seem to be recovering earlier than normal in this cycle reflecting the role played by China, infrastructure projects and supply cutbacks. The commodity super cycle looks to be alive and well.
- While the $A is due for a correction, in the absence of a major setback in the global economic outlook the broad trend is likely to remain up. A rise to around $US0.85 by year end is now quite likely.
- A rising $A is a mixed bag for the Australian economy, but could act as a dampener on the economic recovery and profits.
- The strengthening $A means there is a case for investors to consider having a higher allocation to hedged international equity funds over unhedged funds.