Watch the $A rise again in 2014

Back to the parity.

Yes, that is still where we are going, whether we like it or not. Some laws of science and time travel are indisputable. Our currency is used by just 23 million people, floating above the wealthiest pile of rocks in the world. Another 2 billion people want those rocks, and that’s why the Australian dollar must in the end rise back to parity with the US dollar, and above.

It isn’t rocket science, it’s rock science!

Once we accept the resources boom is not over, it is relatively clear how everything fits together. The world’s most aggressive and backward central bank [the Reserve Bank of Australia] will hike on any excuse, and it is very likely the next move in interest rates will be to the upside around March/April next year.

Whether they cut, or do not hike, it will remain the case that the Australian dollar offers a better yield and a better credit rating than Europe or the USA. If investors want AAA, a decent yield, and a proxy trade on China/Asia again, all wound up in one neat and tidy little parcel, then the Australian dollar becomes the currency of the day.

If anyone is interested in the domestic economy, and its importance from a currency perspective pales in comparison to external and trade factors, it is nonetheless again an extremely positive outlook. I continue to suggest the Australian economy could be running at 4.5% GDP next year, and with still muted inflation.

Inflation will remain low and the RBA will not need to hike, because of modern contemporary economic realities such as competitive price pressures having come of age. The main risk to the Australian economy, apart from over-regulation and over-taxation is, as always, the “Reverse Bank of Australia”. It continues to suffer some form of learning disability, and only ever acts long after data, which is itself very slow to come forth, has confirmed a trend one way or another. Of course, it does have a penchant for hiking and killing off nascent recoveries as it did post GFC, and even pre-GFC, so we have to be cautious of its potential stupidity at all times.

That said, I suggest the Australian economy will be unstoppable next year! The resurgent confidence, though a little patchy post federal election, is likely to solidify and improve, and with the global environment steadily improving at the same time, the Australian business set must soon realise they are being a bit slow and need to play catch-up!

Stop complaining everyone! Go for it! Gain market share and assets and staff at these current low prices while you can. You may never see these prices again for anybody or anything. Of course, I am too old to buy, but there are plenty of young smarts out there, and if you don’t hire them they will grow up to be competitors?

So the outlook for the Australian dollar consists of a re-accelerating China with urbanisation pressures likely to persist for at least another decade, Europe growing, and the US strengthening. It is a strong global growth outlook and Australia is an integral provider of Asia’s core driving resources.

The market looks to have turned back to the upside already as the US dollar resumes its own opposite journey of weakness. As I have said numerous times, the US dollar is vulnerable to a currency shift as part of the trend to there being three equal reserve currencies. On top of that, the deficit remains, and strong data encourages confidence and therefore more overseas investment. The US dollar can fall 10% in the coming year, despite everyone wanting to buy it due to tapering prospects just now.

As I write we are on a $A/US rate of $0,93c. I would not be surprised to see the $A/$US rate move to $US1.12 after all, though perhaps in 2015!

To parity and beyond!

Clifford Bennett is chief economist at Investor Unity. www.IU.com.au/UP