The Australian dollar is again on its way to loftier regions. As forecast in 2006 at 76 cents, the Australian dollar is expected to achieve parity to the US dollar in this fine year 2008.

The reasons are the same as they were back in 2006;

1. China/Asia economic boom creating an insatiable demand for our commodities.
2. The value of those commodities maintaining a bull trend bias for the same reasons.
3. Reserve Bank of Australia setting rates at very high levels by international standards.
4. Sophisticated financial markets and legal system allows Australia to be seen as a long term quality asset of global portfolios.
5. A long term decline of the US dollar which remains in full swing.

All of the above forces are likely to remain in place for some time. Therefore the Australian dollar can be expected to achieve our constantly forecast targets, including the seemingly more distant potential of a move to US$1.08 in 2009.

This is not to say there will be not be some serious bouts of volatility along the way, but the overall trend is likely to remain strongly higher against the falling US dollar. Gains can also be expected against the New Zealand dollar and perhaps Sterling. The Yen could be one of the reasons for some volatility in the Australian dollar in the not too distant future. At some point the Yen will be catapulted higher based on the large trade surpluses that should be maintained despite the US slow down.  While Japanese exporters like their European counterparts may expect a slow-down in exports, more likely they will continue to be surprised by how regional trade is more than making up for that US slow down.

This is the phenomenon I have written about many times previously. The previous decades saw a consistent US centric global economic model, but at the start of this decade I argued we would see two important changes;

1. More balanced global portfolio and capital flows.
2. Rapid growth in intra-regional trade where the economies of Asia, South America, and even Europe increasingly did business with each other rather than purely directing exports to the US.

The problem for the Australian dollar with regard to the Yen, is that when the eventual sudden and sharp realignment of the Yen to the US dollar occurs, toward 103 and subsequently 97, there is likely to be another bout of Yen carry trade unwinding and therefore some significant Australian dollar selling as a side effect. Shortly thereafter the Australian dollar will again be bought back up, but such a dip could be in the order of 2 to 3 cents.

The other potential for volatility in the upward march of the Australian dollar is for Europe and the US and Japan to finally decide to intervene in currency markets in support of the US dollar. This is most likely to occur as we have been suggesting since last year, at around the Euro 1.6400 level. Between 1.62 and 1.64 European politicians are likely to become quite vocal, if for no other reason than to keep their electorates happy and themselves in a job. This process could lead to actual intervention.

Intervention when it comes, could have a profound impact on markets in the near term. The Euro could be driven back to 1.52 or even 1.48. From there however the unstoppable decline of the US dollar would recommence. For the Australian dollar this level of currency volatility could mean a medium term correction from US$1.01 to around 93 cents. We would however still expect to see the Australian dollar heading for US$1.0800 by the end of 2009.

Short-term, having made new highs the market looks set to head toward .9850 perhaps .9920 quite quickly. We may be just a couple of weeks away from parity in fact. For the moment there is strong support at .9640 and .9695 which should contain any immediate volatility. The more aggressive immediate scenario however is for support at .9710 to hold for a push to .9850. Minor resistance at .9785 may see some profit taking just ahead of the 98 cent level. Still bullish!