Can the Australian dollar hit parity?

2010 is likely to see:

Global growth of 4 per cent, led by the emerging world. Basically the 'Great Recession' has given way to the 'Great Recovery'. Absent premature and aggressive monetary and fiscal tightening, a double dip back into recession is most unlikely. In fact, with the US labour market starting to look stronger the US recovery looks like it is on its way to becoming self sustaining.

4 per cent through the year growth in Australia, which will start to push unemployment back down.

Gradual moves to unwind the fiscal and monetary stimulus put in place to combat the financial crisis. But with unemployment around 10 per cent in the US and Europe, the emphasis will be on gradual.

The Australian cash rate is expected to rise to 4.75 per cent by year end and fiscal tightening is likely to commence with the May budget.

Share markets are likely to rise further over the year ahead thanks to the combination of improving economic and profit growth, low inflation and still low interest rates at a time when there is still plenty of cash on the sidelines. However, the easy gains of the 'multiple driven' phase of the equity bull market are behind us and with price to earnings multiples now back to around long term averages earnings growth will be a key driver going forward. The Australian ASX 200 and All Ords indices are expected to rise to 5600 by the end of 2010.

The Australian dollar is likely to resume its rising trend in the first half as it becomes clear that the Reserve Bank of Australia is still raising the cash rate and that the US Federal Reserve remains on hold and this is likely to take the Australian dollar above parity, but expect occasional sharp corrections when the Fed moves towards interest rate hikes around mid-year.

Commercial property values are likely to stabilise and rise modestly, but gains in average Australian house prices are likely to slow as mortgage rates rise and the first home owners boost ends.

Over the next two weeks, US data for house prices, pending home sales, consumer confidence, the ISM business conditions surveys and payroll employment will be released. In the first week of January, US payroll data will be the big one to watch with forward looking labour market indicators suggesting that pretty soon we will start to see the resumption of employment growth.

In Australia, in the first week of January data for building approvals, retail sales and the trade balance will be released. November retail sales are likely to have recorded a modest gain.

Shane Oliver is head of investment strategy & chief economist, AMP Capital Investors.