Australian Dollar Close to Parity on RBA Interest Rate Decision

Tuesday, 2 November 2010

After opening this week close to the 99.00 level, the AUD/USD is holding its ground in preparation for the RBA rate decision later this week. Whilst there is an expectation in the market for no change to the official cash rate in the country, many commentators have signalled that there is still a very slight chance that the RBA could raise rates to 4.75% or potentially higher.

Such a move would spark a further AUD rally - something which hasn’t thus far been discouraged by the RBA or the Australian government.

The issue of course for Australia is that if indeed the currency does make it all the way to parity, the export sector will be in for a shock - given that America is one of the largest export partners for the country. Essentially, with an exchange rate of the AUD/USD at 1.0000 - the attractiveness of Australian products would be decreased - as they would be relatively more expensive in the market.

Because Australia has a large raw materials market - the implications of parity for the exchange rate could be far reaching. Whilst incomes for the large miners would be relatively unaffected in the short term - in the medium to long term, exporters may be hurt by the level of the currency. This of course is once their currency hedges expire.

Following this, there could be flow on effects - such as those to employment, wage levels, and of course government revenue - as revenue from individual firms fell.

This, evidently, would be the worst case scenario. The realistic situation is that parity with the USD will only be maintained for a certain amount of time - at least until the USD strengthens. When that is likely to happen is any one's guess - however given the potential for the quantitative release on Wednesday to surprise the market - it could happen sooner rather than later.

In the mean time, exporters will continue to have to adjust their currency hedging exposure to limit further earnings losses as a result of the AUD/USD being at the level that it is currently at.

For reference, support on the currency pair is currently sitting at 0.9650 - so we are still quite a way above a level that would negate the current uptrend, and this certainly adds to the bullish attitude that many people are holding towards the AUD at present.