Highs and lows in strong $A

The soaring Aussie dollar may take the shine off rural exports but economists are predicting that commodity prices will stay high.

On Tuesday, the $A was trading at 104.92 US cents, off a 29-year peak of 105.85USc set last Friday.

The strong $A has affected the value of beef and lamb exports, however, it has amplified the lift in wool prices.

In addition, strong grain prices have been a buffer for growers against the strong $A, but the market has been balanced on a knife’s edge with prices changing with the weather.

ANZ agricultural economist Paul Deane said the weaker $US had been offsetting the impact of the high $A.

“Australian export sales are well advanced and we have seen particularly strong exports across the board for the first five months of this year,” Mr Deane said.

“The $A is not having a huge impact on grain prices; they are going to still be attractive from a grower’s point of view.

“Beef is another one where the $A is making US beef exports more competitive, but at the same time it’s pushing up the $US price of beef.”

Mr Deane predicted the $A would trade around parity for the rest of 2011.

“Short term, there is a risk the dollar could go to $US1.08–.09,” he said. “By September quarter, we predict it will go to $US1.02–.05 and ease to $US1.02 by the end of the year.”

Rabobank senior analyst Wayne Gordon also believed the $A would remain around parity until the end of the year. Mr Gordon said he had a bullish outlook for commodity prices in the next six to 12 months but expected them to drop off thereafter.

“If the US raised interest rates, the $US would strengthen and the $A would soften,” he said. “This helps us on a competitive basis, but the rally in commodity prices is largely based on the weak $US.”

Mr Gordon said global grain stocks were tight and, compounding this, Australia had been left with bulk feed grain from the tough 2010 season.

“Unfortunately, if we see a good season this year, prices will soften in 2012,” he said.

“However, it is not guaranteed that the world will have a good harvest; there are several risks including hot conditions in Europe, cold conditions in Canada and dry conditions in the US.

“We could see $US10 a bushel if one of the major producers has a significant fall in production.”

Commonwealth Bank currency strategist Joseph Capurso said he believed the $A had a bit more upside left in it before it tracked down.

Mr Capurso said the $A had fallen from last week’s high on the back of uncertainty in Japan.

“The $US is weak, commodity prices are high and Australian interest rates are likely to keep tracking higher,” he said.

“At the end of the year, we believe the $A will be at 92USc, but it may be a bit higher.”