Australian Dollar Outlook

THE Australian dollar exchange rate is expected to stay above 90 US cents throughout 2011 as the Reserve Bank continues to raise interest rates.

Australia's resource sector is also tipped to prop up the domestic economy, replacing stimulus spending as a key driver of growth.

The "high-flying" Australian dollar should stay well supported for a while longer, Access Economics said in its latest Business Outlook report.

The forecaster's director Chris Richardson said he envisaged the Australian dollar rate staying above 90 US cents throughout 2011, but not going much beyond parity.

"We face roughly a year with the dollar being strong," he told AAP.

The Reserve Bank is also tipped to keep raising interest rates next year as wage costs put pressure on inflation.

"Australia's economy continues to dance to the beat of a different drum, and continuing good economic news and the coming inflection in inflation are likely to see the Reserve Bank raising rates again," the report said.

The cash rate was tipped to climb from 4.5 per cent at present to 6 per cent by the end of 2011, with the central bank tipped to raise the cash rate at least once before Christmas.

The report said business investment in the resources sector would be "absolutely vital" to Australia's economic recovery, replacing public stimulus spending as a growth driver.

"We need to see the likes of the Gorgon project and other resource spending take the baton of growth from the construction of school halls," it said.

This would offset sluggishness in the retail and housing construction sectors, the report said.

By the end of next year, Australia's terms of trade was expected to fall as a greater global supply of resources caused commodity prices to "return to earth".

The central banks of other advanced nations, including the US, would also start to lift interest rates.

This would diminish Australia's interest rate differential with other advanced economies and see the local currency fall off its highs, Mr Richardson said.

When it came to politics, Access Economics had misgivings about a minority government offering "a bucket of bribes" to the regions and promoting populist economic policies.

"They're not going to risk political capital going for the right thing," Mr Richardson said.

He cited shadow treasurer Joe Hockey's call to regulate bank interest rates as an example of irresponsible politics, and urged the government to refrain from erecting new trade barriers, subsidising old industries and reaching for regulation without checking if its costs outweighed benefits.

"And don't chase the chimera of 'supporting jobs' in an economy that is already close to full employment," Access said.

Access Economics is expecting consumer price index data for the September quarter to show an annual growth of 2.9 per cent and a quarterly pace of 0.75 per cent, when the figures are released tomorrow.

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Euros To Australian Dollars = 1.4185
Australian Dollars to US Dollars = 0.9920
Australian Dollars to New Zealand Dollars = 1.3152

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Australian dollar's impact on company profits

THE Australian dollar's impact on company profits should be a mixed bag this reporting season.

On one hand, a more than US Dollar 8c decline against the greenback after the dollar punched above US94c in November would have come as a welcome relief to businesses with big US exposures, The Australian reported.

"If anything, that is going to provide a modest boost to earnings," said UBS chief strategist David Cassidy.

But its stellar march forward against the euro is likely to have dented the profitability of companies with operations in Europe. "For companies with big euro rate exposure, that is going to be a pretty clear headwind," Mr Cassidy said.

Last financial year was a roller-coaster 12 months for the Aussie Dollar. After breaking through US94c in November, it was sold down heavily in May to a low of US80.65c, as concerns over Europe's debt crisis intensified.

Fat Prophets analyst Colin Whitehead said the dip would have benefited exporters such as Foster's, which would have been able to compete more effectively on price. "Then you have the broader macro effect of tourism - during periods of Australian dollar weakness the tourism industry will benefit from more overseas visitors."

By the end of the financial year, the Australian dollar Rate had recovered more than 6 per cent to end the year at US85.53c, limiting its effect on local groups with US operations.

RBS equities strategist Greg Goodsell said he would be surprised if the dollar, against the greenback, was a big factor this reporting season.

"In the last 12 months it has averaged between US78c and US92c, so it has been in a reasonable range, whereas during the GFC it went down to the low 60s," he said.

He said Australian stocks generally did not take naked currency risk any more. "Most of them manage their exposures pretty well - they either put financial hedges in place if they have a significant degree of risk or do natural hedging, so if they have US dollar assets they will typically fund themselves in US dollars," Mr Goodsell said.

"Because of that, the currency has to move a long way to have a big impact on earnings results."

But Mr Cassidy said there could be some euro-related downgrades to watch for due to the dollar's strength against the euro exchange rate.

Last financial year, the dollar surged about 20 per cent against the euro, reflecting the differing outlooks for the Australian and euro-zone economies. "Obviously there are lots of moving parts as to how the business is actually going operationally, but companies like Amcor and Brambles do have big European operations," Mr Cassidy said.

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Euros To Australian Dollars = 1.4903
Australian Dollars to US Dollars = 0.8697
Australian Dollars to New Zealand Dollars = 1.1599

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Australia does not have a speculative housing bubble

THE Reserve Bank has warned lenders and borrowers to be prudent while giving an assurance that Australia does not have a speculative housing bubble on its hands.

Fears of a property bubble emerged after the Australian Bureau of Statistics house price index rose 20 per cent in the year to March.

But RBA head of financial stability Luci Ellis said Australian house prices have recovered their small decline from 2008 to post increases of between about 12 to 15 per cent over the past year in capital cities, depending on the measure.

Ms Ellis said recent data suggested Australia does "not have a credit-fuelled speculative boom on our hands".

"It would not be desirable for the current situation to turn into one," she said in a speech.

"It will therefore be important for lenders to remain prudent in their standards.

"It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts."

She told a residential property conference housing prices have been under upward pressure in Australia, with most short-term drivers coming from the demand side following the increased first home-buyers grant, low interest rates and lower than expected unemployment.

"The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices," she said.

"Some of that pick-up in construction does seem to be happening."

She said the supply of housing was always going to be quite "sluggish".

"But whatever the causes, the ability to add to supply is falling short of this higher rate of population growth, despite some pick-up recently," she said.

"Naturally that is putting upward pressure on housing prices."

Ms Ellis said it would be "desirable" for the supply of new dwellings to become more flexible than it had been to date because extra people need somewhere to live, and both house prices and rents could rise.

The more that housing prices rise, the more some people might feel they must stretch their finances to buy a home, she said.

Another concern was that if too much of the response to faster population growth comes as faster growth in housing prices, this could be "built into people's expectations".

"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment, or worse," she said.

She also said fewer households had bought their homes without debt.

Across the mortgage market, lending standards were now a little tighter than they were a few years ago and the fraction of low documentation loans was now lower than it was two years ago for both owner occupiers and investors, she said.

As well, only a minority of recent home loan borrowers started with a loan to value ratio above 90 per cent, she said.

Ms Ellis also revealed the RBA has been carefully watching lending standards in the important first-home buyer market segment.

"First-home buyers have long faced greater risk than more established home owners who have more equity in their home," she said.

"But as far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers."

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Euros To Australian Dollars = 1.4181
Australian Dollars to US Dollars = 0.8727
Australian Dollars to New Zealand Dollars = 1.2750

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Australian Dollar will continue to strengthen against the euro and the pound.

Parity talk time again for the Aussie

Almost two years since the Australian dollar touched generation-high levels against the
US dollar rate at almost 98 US cents, debate over whether and when the Aussie dollar will exceed the greenback in value is back.

The Reserve Bank's move this week to raise its cash rate again sparked fresh impetus to the Aussie dollar's rise. The central bank's signal that more rate rises are ahead also added to the currency's relative allure.

And economists are dusting off the history books to assess the currency's rise against other
currencies, particularly those in Europe. The Aussie dollar remains at record levels versus the euro, where it's trading just below 70 euro cents, while it hasn't bought this many UK pence (currently about 61) in 25 years.

AMP Investor chief economist Shane Oliver believes the relative strength of Australia's resource-based economy will push the Aussie dollar, currently buying 92.9 US cents, to parity against the greenback before the year is out.

Indeed, Mr Oliver says the local dollar's recent rise is bringing it back into line with its longer-term averages. While it's traded at less than par with the US dollar since its float in 1983, Australia's dollar had been worth more than the greenback for the great bulk of the country's history, particularly during the era before the switch to a decimal currency in 1966.

''Back in 1901 the equivalent of one Australian dollar bought $US2.40 and for most of the last century the Australian dollar was above parity against the US dollar,'' Mr Oliver said, in a note to clients.

''It is likely the sub-parity period from the 1980s was the aberration for the Australian dollar and the improvement in Australia's relative fundamentals suggest it is likely the Australian dollar is going back above parity against the US dollar.''

The Aussie has risen 1.5 per cent in the past month alone against the US dollar, or 3.6 per cent since the beginning of the year, making it among the top five performers among major currencies during the period, according to Bloomberg data.

RBA outlook

Bolstering the local dollar's recent rise has been the Reserve Bank's series of five interest rate rises since October to 4.25 per cent. With the US Federal Reserve's lending rate remaining near zero, the gap between the two interest rates is the widest since 2008.

That gap may widen further, with financial markets betting on another four RBA interest rate rises over the coming year to prevent the economy expanding too fast. The unemployment rate now sits at 5.3 per cent, and may drop below 5 per cent before the end of 2010 - about half the current jobless rate in the US.

To be sure, at less than 93 US cents, the currency still has a fair way to go before parity is reached. Even so, NAB expects the Aussie dollar to trade at parity levels in the second and third quarters of this year, while overseas banks Nomura and Standard Chartered Bank are among those predicting parity by the final quarter of 2010. ANZ economist Amber Rabinov, though, forecasts the Australia dollar's rise will stall in the mid-90 US cent levels as worries resurface about the health of the global economic recovery.

''The continued depreciation of the euro versus the US dollar due to a lagging Euro zone recovery and sovereign credit concerns should cap gains in the Australian dollar,'' Ms Rabinov said.

Nonetheless, she said the Australian Dollar will continue to strengthen against the euro
and the pound. Other analysts are more pessimistic, though, seeing the Australian dollar
retreating over the year as investors grew skittish again about risk as troubles re-emerge in Europe, the US, and China.''I'm more a believer that the Aussie will end the year closer to 80 US cents rather than parity,'' said Arab Bank Australia Treasury Dealer David Scutt.

''We are only an economy of 22 million people and completely reliant upon the happenings offshore, a fact that many people have forgotten since the recovery process began.''

Mr Scutt said some countries, particularly in Europe, will struggle to meet their debt repayments, sapping the global appetite for currencies deemed to be relatively risky, such as the Australian dollar.

To Read more please visit

www.smh.com.au

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Euros To Australian Dollars = 1.4388
Australian Dollars to US Dollars = 0.9308
Australian Dollars to New Zealand Dollars = 1.3000

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Australian Dollar Outlook improves as RBA leave Australian Interest Rates Unchanged

Australian Dollar Rate Outlook

THE Reserve Bank of Australia left the interest rates unchanged in February so it could assess the impact of earlier rate rises from both itself and the big banks on the domestic economy. The central bank board surprised financial markets by leaving the overnight cash rate steady at 3.75 per cent earlier this month.

"In considering the level of interest rates, members noted that the three increases in the cash rate late in 2009, together with the widening in the margins between the cash rate and many lending rates, had meant a material adjustment to the stance of monetary policy," minutes from the board meeting released today said.

"Members judged that monetary conditions were no longer exceptionally accommodative, though the structure of interest rates was still somewhat below average." The RBA had lifted the cash rate by 25 basis points at each of its meetings in October, November and December to its current 3.75 per cent.

The board noted the decision to leave the cash rate unchanged was "finely balanced" - as it also was at the December meeting - but its members expected further rate increases if the economy continued to improve as predicted.

"But they did not regard that outlook as requiring an increase at every meeting, and they saw the earlier moves to begin withdrawing monetary stimulus promptly as affording the board a degree of flexibility in its subsequent decisions," it said.

"This allowed the possibility of waiting to receive some more information on how the economy was responding to the monetary tightening that had already occurred.

"Such a course would also allow time to monitor events overseas."

The bank said most market participants had expected the cash rate to rise this month, but board members had decided the "stronger case" was to leave the cash rate unchanged.
Market economists had widely expected a quarter of a percentage point rise to 4.0 per cent on February 2.

"This decision would be accompanied by communication that, if economic conditions evolved broadly as expected, further adjustments to policy would probably be needed over time to ensure that inflation remained consistent with the target over the medium term," the minutes said.

The RBA uses monetary policy, or interest rates, to keep inflation within a target range of two to three per cent over the economic cycle. Headline consumer price inflation (CPI) was 0.5 per cent in the December quarter for an annual rate of 2.1 per cent, recent official data show.
Underlying inflation, the RBA's preferred measures as it removes volatile items, was 0.6 per cent in the December quarter, while the annual rate was 3.4 per cent - still above the bank's target range.

"Members noted that the forecasts were for further declines in the year-ended rate of underlying inflation, though the expected trough in inflation had been revised up slightly," the RBA said.

In its quarterly statement on monetary policy released on February 5, the RBA forecast underlying inflation to fall within its inflation target in the first half of 2010.

To read more please visit www.news.com.au

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Euros To Australian Dollars = 1.5350

Australian Dollars to US Dollars = 0.8909

Australian Dollars to New Zealand Dollars = 1.2550

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Commonwealth enjoys massive windfall as it declines to lift deposit rates

Australian Dollar Rate Outlook

FIRST it was home buyers getting slugged - now it's those of us lucky to have a few Australian dollars to tuck away in a deposit account.

A decision by Commonwealth Bank bosses to keep rates low has delivered a massive windfall - a $2.94 billion half-year profit.

While its competitors were quick to lift deposit rates in a bid to attract customers, the CBA maintained ultra-low rates until the final weeks of the first half of 2009-10. "If you're a CBA shareholder you'd be delighted with the result, but if you're a CBA customer you'd have to be asking yourself if they're providing you with the best possible service," said Choice spokesman Christopher Zinn.

He said savers should shop around: "The banks are fully cognisant that a lot of people just roll over and don't move to take better rates." Figures released by the CBA showed its docile depositors did not move their money into better-paying accounts at rival banks. CBA chief executive Ralph Norris was coy when asked about the windfall reaped from lazy depositors. Asked about the stickiness of so-called "dumb money", Mr Norris said: "There is a proportion of our funds which is less rate-sensitive. that gives us an advantage."

Mr Norris indicated, however, that the bank would soon move to make its transaction and online saver accounts more competitive. CBA, Australia's largest bank, paid a measly average of 2.73 per cent on the $78 billion in its term deposit accounts, almost half what it paid a year ago.
Its plethora of transaction account holders only received a yield of 1.32 per cent on a total of $69 billion, again about half the average rate paid 12 months ago.

The Commonwealth Bank's half-year accounts also show it has been relatively kind to its home loan customers, despite instances of the bank lifting its standard variable rate higher than the Reserve Bank's cash-rate increases.

To read more please visit www.news.com.au

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Euros To Australian Dollars = 1.5350
Australian Dollars to US Dollars = 0.8909
Australian Dollars to New Zealand Dollars = 1.2550

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Australian Property Prices continue to rise

Australian Dollar Rate Outlook

MELBOURNE'S property spree looks set to continue despite the looming threat of an interest rate rise.

Economists tip the Reserve Bank of Australia board will make history when it meets tomorrow by increasing official rates for the third month running. A 0.25 percentage point increase would bring the cash rate to 3.75 per cent, adding $45 a month to repayments on the average Australian mortgage of $300,000. There were more than 1000 auctions at the weekend, and about 2500 more are scheduled in the three remaining weeks before Christmas. The flood of stock trimmed Melbourne's auction clearance rate from its recent levels of 80 per cent to 78 per cent. Results were still solid despite heavy rain yesterday morning.

"Nothing's dampening the market at the moment," said Hocking Stuart Richmond director Chris Murphy. Yesterday afternoon Mr Murphy sold a Victorian terrace in Cubitt St, Richmond, for $756,000 - well above the advertised selling range of between $620,000 and $680,000. "We've sold nine out of 10 in Richmond this weekend," Mr Murphy said. A rise in interest rates would do little to cool the red-hot market, he said.

If the RBA decides on an increase to 3.75 per cent the official cash rate would still be lower than it has been for the past 20 years, excluding the global financial crisis. "We're coming off such a low base I don't think it will make a difference," Mr Murphy said. "If anyone's got any cash left after the GFC they're out and about bidding."

Real Estate Institute of Victoria's Robert Larocca said a lift in interest rates would be unlikely to shift the market until next year.

"If you're in the market at the moment you're committed and unlikely to change your course," he said.

Would-be homebuyers were aware that interest rates are on the way up and were already pricing in further rate increases. He said rates couldn't remain at emergency lows indefinitely.

To read more please visit www.news.com.au

Pounds to Australian Dollars = 1.8028
Euros To Australian Dollars = 1.6440
Australian Dollars to US Dollars = 0.9150
Australian Dollars to New Zealand Dollars = 1.2770

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Contact IMS Foreign Exchange + 44 207 183 2790