WEEKEND ECONOMIST: Parity and beyond

Higher domestic interest rates and a giant new round of global quantitative easing are set to push the Australian dollar well past parity, with limited downside risk.

The question must now be posed as to whether this weakening trend in the USD can be expected to extend much further. That is likely to depend on the prospects for quantitative easing by the US Federal Reserve. Undoubtedly much of the USD weakness since the Fed chairman’s speech at Jackson Hole on August 27 can be attributed to the markets pricing in this quantitative easing policy. In that speech the chairman clearly outlined his options to embark upon another program of quantitative easing following the first program which spanned from September 2008 to March 2010 over which period the Fed increased its balance sheet from $1.2 trillion to above $2.3 trillion. The bulk of outright asset purchases occurred between January 2009 and January 2010.

Markets were initially sceptical on how large any new easing program would be particularly given that there appeared to be considerable dissension within the FOMC. Over the last week the picture has, in our view, become much clearer.

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