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From the SMH blog:

Commonwealth Bank forecasts maintain the Reserve Bank is on track to raise interest rates in the fourth-quarter of 2014, and again in the first-quarter of 2015.

The beginning of an upward cycle in interest rates will ensure fresh support for the currency and could put it on track to repeat parity against the greenback next year.

CBA currency strategist Peter Dragicevich agrees the dollar is trading higher than where the market thought it would be 12 months ago but equally there was good reason for buying:

  • The signs and the data suggests that the economic transition away from mining investment is coming through better than what people were expecting a year ago, the RBA has also shifted to a neutral bias from an easing bias… and the effect on the US dollar of asset purchase tapering hasn’t been what people expected.
  • The global economy is actually looking a lot better. Europe is starting to pick up, the US looks like it’s in a better spot as well.
  • A year ago people were expecting the Aussie to be in the low US80s at the end of this year… it’s quite conceivable that we do test parity [again].
  • The RBA may not necessarily be as frustrated with achieving parity amid a tightening cycle compared with its position on a rising currency in late 2013 and to a lesser extent, current levels.
  • You need to put the domestic situation in context. The Aussie has lifted in the last couple of months but the data has improved as well.

CBA expects the Australian dollar to hit 97 US cents at year-end and 99 US cents by March 2015.

This is rubbish. The RBA will not raise rates for this very reason. If housing overheats then it will go for macroprudential first. If it jacked rates into the terms of trade falls and capex cliff then recession would become very likely.

If I were a little more conspiracy minded, I’d conclude that CBA is talking up the dollar to prevent rate rises.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.