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Oz dollar going up? D'oh!

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by Peter Switzer

Yippee! The experts now tip the Aussie dollar goes higher from these record levels, which is great for holidaymakers but it might not help our shares. Mind you, I still think they will go up but by not as much as I would like and probably by not as much as Wall Street’s indexes.

In case you have been busy or sleeping, we’re now around 103.23 US cents and now the head of currencies and commodities for J.P. Morgan's private bank, Rebecca Patterson, has been reported by CNBC saying that it’s still looking good.

"Higher commodity prices bring Australia greater trade revenues,” she wrote in a client note. “In addition, however, Australia attracts capital flows tied to these resources — both foreign direct investment (M&A) and equity and bond inflows as foreign investors want to gain exposure to Australia’s commodities and commodity-related firms.”

Not surprisingly, M&A volumes are on the rise here and they won’t ease up for some time, market experts predict.

Cash rate impact

But it’s not all good news. J.P.Morgan thinks the RBA’s cash rate of interest will go from the current 4.75 per cent to 5.25 per cent by year’s end! And if this happens, this too will push the dollar higher.

The irony for Australia at the moment is that bad news for the Aussie dollar could actually reduce the likelihood of interest rate rises and this in turn could help the property market and those many small businesses hurt by a high dollar and interest rates.

“Bullish sentiment on Australia is very strong, and negative news could cause that mood to shift quickly, with a potentially dramatic impact on the Aussie dollar,” Patterson concluded.

Oz dollar target

Incidentally, her target for the Aussie was 103 US cents but that’s likely to be pushed up soon, she hinted.

For regular viewers of my SWITZER program, my currency expert Clifford Bennett from Herston Economics has been right on the money when it comes to the Aussie. He has a target north of 103 US cents as well for the currency.

On Wall Street…

By the way, Wall Street has had another great night considering the stuff that is going down around the world right now.

The S&P 500 was up 8.82 points, or 0.67 per cent, to 1328.26 and it was helped by the ADP employment report that said the private sector added 201,000 jobs in March. This comes out ahead of Friday’s official jobs numbers but it certainly reinforces my long-held and regularly argued point of view that the US economic recovery continues and gets stronger.

Also, there was some better-than-expected planned lay offs news out in the States as well.

All this means that Wall Street can track higher over the year, though there will be pullbacks linked to international dramas, which are in big supply at the moment and don’t look like abating.

Outlook for Aussie shares

For Australian shares, I see us going higher too — there has been a strong link between higher commodity prices, a firmer Oz dollar and Wall Street going higher but the above parity local dollar will trim our share price rises. A high dollar makes our shares more expensive for foreigners, and local companies not helped by a strong dollar make less profits and this shows up in shares prices.

In economics, you just can’t have it all.

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.

Watch more from Peter on SWITZER TV.

Published on: Thursday, March 31, 2011

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