Business News

Could our dollar see US$1.20?

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by Peter Switzer

Here’s a bold prediction that could spook investors — the Oz dollar could go higher than US$1.10 and could even head towards US$1.20!

This is the bold possibility put forward by Marcel von Pfyffer, an economist with RBS Morgans in Brisbane. But it doesn’t mean that our share market will have to languish behind Wall Street as it has in the past year.

Marcel says the context of such a spike would be with the prices of the commodities we sell going much higher and this would drive up many of the stocks that fuel our index — BHP Billiton, Rio Tinto and the like.

By the way, he argues that the US slowdown is temporary, and better growth will resume in the second half of 2011.

He contends that there’s a much higher correlation with our stock market and Wall Street than before the GFC and so is optimistic that our share prices have a positive outlook.

Going back 30 years to the GFC, the correlation of annual returns out of our stock market with the US counterpart was around 44 per cent but since the GFC it has shot up to 86 per cent!

And in the US operating earnings per share are actually back to levels similar to June 2007, which was pre-GFC. Better still, the returns on the US market are now coming out of energy and IT companies rather than artificially bloated finance companies.

He also pointed out that the copper price is important for the earnings of companies in our index. Pre-GFC the correlation of copper price to annual market returns was 15 per cent but now is 58 per cent.

Copper is a great global growth indicator and copper’s outlook is massively bullish.

But we still have the problem that a high dollar turns off foreign investors and hurts our stock market. Marcel says if the US dollar falls and our dollar rises, commodity prices will go up because they’re priced in US dollars.

This will drive up the share prices of those companies predisposed to such commodities and that’s a tip for the likes of BHP and Rio.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, June 10, 2011

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