The warning from ABARE about the strength of the Australian dollar is worth considering.
The Bureau says this strength "appears to reflect an improvement in financial market sentiment toward the prospects for world economic recovery, the likely effect of stronger world economic activity on commodity demand and prices, and the implications of the above developments for Australia’s terms of trade and export performance".
In other words, Australia is a proxy currency for recovery: it’s why the currency fell 2 USc on Monday night when the US and European markets took fright at the World Bank growth downgrade, which wasn’t really news.
ABARE says another factor which has affected movements in the Australian dollar is a weakening of the US dollar against major international currencies.
The US dollar was trading around €0.72 and ¥96 in early June 2009, compared with €0.74 and ¥98 in late March 2009, and €0.80 and ¥102 in late October 2008.
That in turn has helped boost the value of commodities, lead by oil, copper, lead, aluminium and zinc, plus nickel.
Agricultural commodities haven’t been as noticeably impacted by the dollar’s fall because of the importance of the current Northern hemisphere growing season, especially in the US.
ABARE says that "Looking forward, an assumed improvement in world economic activity is expected to provide support to the Australian dollar in the short term.
"Judging by its historical movements, the Australian dollar has a tendency to appreciate strongly in the beginning phase of world economic recovery.
"This mainly reflects market expectations of stronger commodity prices on world markets, especially for minerals and energy, in response to improved prospects for world economic growth.
"Therefore, there is a distinct possibility the Australian dollar could remain at its current level or even appreciate further against the US dollar in the near term.
"This would especially be the case if economic indicators continue pointing to a stronger than expected world economic recovery."
So there’s considerable uncertainty surrounding the short-term outlook for the Australian dollar; especially if world markets turn down and correct from the March rally.
"As discussed above, over the past 12 months the Australian dollar has fluctuated from a high of US98c and TWI 74 in mid-July 2008 to a low of US60c and TWI 51 in late October 2008," ABARE said.
The Australian dollar hit an eight-month high of 82.23 USc on June 2,
"Since the floating of the Australian dollar in December 1983, it has had an average annual fluctuation range of more than US10c.
"Consequently, it remains important for primary producers and exporters to manage the risks associated with fluctuations in the Australian exchange rate.
"In preparing this set of commodity forecasts, the Australian dollar is assumed to average around US77c and TWI 62 in 2009-10. This compares with an average of US75c and TWI 60 in 2008-09."
