Australian Dollar: The Next to Reach Parity?

It has been a record breaking past few months in the currency markets. While the EURUSD, the most actively traded pair in the world, made headlines when it surpassed its all time high late September; the story was quickly overshadowed by the Canadian dollar which reached parity with the US dollar. Six months ago, parity still seemed to be a far fetched idea for loonie traders and now, the Canadian dollar is actually stronger than the US dollar.

Could the same thing happen to the Australian dollar? Why not? The currency pair is closer to parity now than the Canadian dollar was five months ago. Although it is possible for the Australian dollar to be even with the US dollar, the better question to ask is whether it is probable.
The Australian dollar has already made its mark by rallying over 15 percent in the past eight weeks to a 23-year high against the US dollar. Clear similarities between the Australian and Canadian dollar’s advance could raise expectations that one Australian dollar could soon equal one US dollar. Like Canada, Australia’s economy is rich in natural resources; enjoys a strong economy supported by domestic spending; and has a central bank that is leaning closer towards further hikes than any sort of policy easing.

Australian Dollar Rally Contingent Upon Commodity Strength
One of the main drivers of Aussie strength has been its correlation with commodity prices. Shipments of raw materials like gold, coal, and iron ore account for nearly 64 percent of total exports. Although this leverages considerable dependence on one volatile sector of the economy, over the last few years, this influence has proved to be one of Australia’s leading sources of growth. With China sustaining double digit growth rates, their demand for commodities have been extremely robust.

A modernizing economy requires a greater use of energy and coal accounts for approximately 70 percent of China’s total energy consumption. As the world’s largest exporter of coal, Australia benefits significantly from China’s demand. From an economics stand point, greater demand for these goods translates into bigger revenues for Australian producers, stronger capital spending and higher employment.

In addition to coal, prices of gold have also been increasing – Australia is the world’s third largest producer of gold. The correlation between gold prices and AUDUSD can be seen in the graph below. Whether the AUD/USD can make it to parity will be partially dependent upon whether gold will hit $1000 an ounce. With gold trading at a 27 year high, there is no convincing sign that a top is in the making quite yet. Over the third quarter, gold prices climbed 16 percent or approximately $100 an ounce and it is now begging to at least $750..The main reason why gold has been so strong is because people have no faith in the US dollar – they took the greenback down to a record low last month.

Gold is seen as the safety net for many investors which means that the uptrend in gold will not give way until the US economy has hit a bottom. Should $750 an ounce in gold prove to be an unsurpassable barrier however, then so will 95 cents in the Australian dollar.