The Australian dollar is close to hitting parity against the US dollar, a level last reached in mid-1982. Interest rate differentials will probably remain the main driver of where the exchange rate moves, and should offset what happens to commodity prices and risk appetite, provided an extreme deterioration in the latter is avoided. We expect Australian interest rates to rise soon, and anticipate that the Aussie dollar will quickly rise through parity and will then stay above parity over the next 12 months. In contrast, the Bloomberg median is for depreciation to 0.93 by end-2010 and then 0.91 by end-2011.
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