Everyone is talking up whether our dollar will reach parity with the US. In my opinion, the Australian dollar will not only reach parity but move to between $1.10 and $1.20 over the next 6 to 12 months.
The main reason is that the US economy continues to remain in bad shape, although that said there are some encouraging signs, but not enough to allay fears that their economy could experience a double dip recession. In response to this, the US treasury are continuing to print money in an attempt to stimulate the economy and avoid the prospect of a further recession.
The same cannot be said for Australia as commodity prices remain strong, employment figures are good, and whilst the US continues to print money the Australian dollar continues to get stronger. Whilst this is good news for those travelling overseas, it is not good for our exporters who like the dollar to sit between $0.70 and $0.80. We will have to wait and see how the high Australian dollar effects our economic growth, and for mortgages this may result in a positive outcome as an interest rate rise may not be needed.
So what do we expect in the market?
This week I have spoken with a number of financial service businesses who have advised that many investors are staying out of the market due to the fear of a double dip recession in the US. However, the market is unlikely to fall simply because if everyone is out of the market believing it will fall, then the only way is up. In essence this is what is referred to as a contrarian view which the professionals are taking advantage of by buying on the dips when everyone is looking the other way.
After showing signs of indecision for the past two weeks and looking more like it would fall, this week the Australian share market has done the opposite and risen strongly. Given this strong move, I would expect further rises to unfold with the market reaching my first target of between 4,800 and 5,000 points earlier than expected. At this stage I believe the market will reach these levels in the next four weeks before falling away into a low early to mid December. Medium term I believe the rise will generally continue through to around March or April next year before our next major move down.
Dale Gillham is Chief Analyst with Wealth Within.
