Aussie Dollar at $1.30: Are You Kidding?
The robust Australian dollar could actually get a whole lot stronger over the next two years, rising to as high as $1.30, but this is subject to strong gains in Asian equity markets, forecasts one analyst.
Australia's currency has risen about 6 percent from lows hit against the greenback in June last year, maintaining its resilience in the face of interest rates cuts which are often negative for a currency.
Australian Dollar 10-Year Chart Performance
Kerry Series, founder and chief investment officer at Eight Investment Partners, says the Aussie dollar can go "substantially higher."
One reason for this, he argues, is a strong correlation between the currency and Asian equity markets, which are poised to head higher.
"We did some work on the relationship between the Asian stock markets and the Australian dollar and found that over the past 17 years, there's been a correlation….for every one percent that the Asian stock markets go up, the Australian dollar goes up about 0.5 percent," Series told CNBC Asia's "Cash Flow" on Tuesday.
(Read More: At Last, China Bulls Are Having Moment in the Sun)
"And we think that the Asian stock markets are undervalued by at least 20 percent to average, so the next 2 to 3 years, we think the Asian stock markets could go up substantially more than that," he said.
Series added: "If the relationship of the last 17 years holds, that would imply an Australian dollar of $1.20 to $1.30." His forecasts suggest a gain of between 16 percent and 26 percent from current levels.
Perhaps that doesn't look too dramatic given the Australian dollar's past performance: the currency has risen about 15 percent against the dollar over the last three years and is up some 60 percent from where it traded in early 2009 as the world emerged from the global financial crisis.
(Read More: You Just Can't Keep This Currency Down)
Another reason Series gave for his expectations of a stronger Australian dollar was that the monetary easing conducted by Australia's central bank has not been as deep as that conducted by other major central banks such as the U.S. Federal Reserve.
An ultra-easy monetary policy and interest rates near zero in the U.S. have put pressure on the greenback to weaken. And while the Reserve Bank of Australia has lowered interest rates 175 basis points since late 2011, its key rate of 3 percent is one of the highest among developed nations, helping underpin the appeal of the Aussie dollar.
Indeed, the relative difference in interest rates is often cited by analysts as a reason for the Australian currency's resilience.
(Read More: Australia Banks Slash Mortgage Rates)
David Greene, senior corporate foreign exchange dealer at Western Union Business Solutions in Sydney said it was difficult to predict where the Australian currency would be trading on a two to three year horizon.
"We're a short-term market looking for long-term trends so where's the Aussie going to be? In and around $1.03 short-term, and long-term, north of $1.06 is expensive," he said.