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Aussie Dollar a Buy - or Overbought?

AP

The Australian dollar has had quite a run, what with commodity prices going on a tear. But what's next is another story.

Think currencies just stick to tiny incremental moves? In the past year, the Australian dollar has risen 21% against its U.S. counterpart, thanks to strong commodity prices and relatively high interest rates. But where it's headed next is unclear.

Westpac, has broken ranks with the other Australian banks to forecast an interest rate cut - which would dent the dollar - before the end of the year. Bill Evans, Westpac's chief economist, is worried about the mess in Europe and waning Australian consumer confidence.

"The catalyst for that fall will initially be the turmoil in Europe," he said. "It's very, very hard to find anyone who feels that a sensible solution will be found to European probs without major, major dislocation in the financial markets." He's also concerned about weak credit growth and consumer spending.

But Adam Gilmour, co-head of FX & derivatives sales at Citi Asia Pacific, says the Australian dollar is still a buy.

"I still like the Aussie. I still think it can go higher," Gilmour told CNBC. "There's still a massive amount of infrastructure spending."

Gilmour points to a recent Citi research report "talking about hundreds of billions of dollars of investment both in the metals and in the LNG space. In the next five years, this is going to be very positive for the Australian dollar."

As for interest rates, Gilmour thinks they will stay where the are for the rest of the year. "The mining industry never stops," he says. "Housing prices are still very high, so I can't see big cuts in interest rates."

Looks like you have to decide whether to focus on the miners or the consumers - and be nimble. In the meantime, you can watch Gilmour's analysis of the Aussie's prospects in the video clip.

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