I was asked a number of times over the long weekend what could cause the Aussie dollar to crash or correct. The answer is very straight forward.
The Aussie dollar is in demand at present because of two main factors. The first is the interest rate differential between Australia and the United States. The second is the demand for our resources and the present interest in commodities markets, especially copper and gold.
In order for the dollar to correct, there would need to be a significant shift in one of the above.
The demand for commodities doesn't look like shifting in the near term. The rise of China and its economic dominance is simply too strong. That may change in the medium term but for now it's pretty firm.
The real threat will come from the US raising rates. However this won't be because of the growing strength in their economy. It may simply be because (with rising inflation) they simply have no choice. I can't see this happening until well into the second half of this calendar year but it's certainly a possibility.
That, combined with a material slowdown in China, could see the Aussie move down to 85 to 90 US cents. That's the worst case scenario as I see it. That's because another growing factor supporting the dollar is the slow and steady depreciation of the US dollar - and that's likely to provide a nice tailwind for the Aussie for some time yet.
David Taylor
