Chris Zappone

Travellers looking to take advantage of the Australian dollar’s strength, may want to act soon. The swift rise of the Aussie versus the greenback has left investors wondering how much higher it can go before a correction sets in.

We have noticed that some customers are opting to pay for the components of their trip that are affected by fluctuating exchange rates now while the dollar is stronger, thereby locking in the favourable rate, said Lisa Ferrari of Travel.com.au.

Travel to the US has also been helped by fare competition, Ms Ferrari said.

Since Friday, the dollar has jumped nearly 4 per cent, driven by a strong sharemarket, rising commodities prices and gathering optimism about Australia’s economic future. This morning it is buying 84.10 US cents, unchanged from yesterday.

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Nonetheless, a number of analysts have warned that the Aussie is due for a fall.

We’re still of the view that the Aussie dollar is overvalued, said TD Securities economist Annette Beacher. The market has run ahead of itself in terms of forecasting interest rate increases sooner rather than later.

The market currently expects 1.5 percentage points of Reserve Bank interest rate hikes in the next 12 months, which would take the cash rate to 4.5 per cent by August of 2010 from its current 49-year low of 3 per cent.

We do believe a correction is on the cards, she said. However, the RBA isn’t doing anything to water down speculation of higher interest rates sooner rather than later.

It looks like the Aussie will be supported until later this month when we get some woeful numbers on capital expenditure and construction that might take a bit of steam out of the currency.

In the meantime, Ms Beacher said it was impossible to rule out the Aussie hitting 85-90 US cents.

It’s completely and utterly unjustified given GDP is set to track sideward for another 3 months, she said.

But we just can’t rule out the Aussie being frothy for longer.

Other analysts agree.

RBC Capital Market’s Sue Trinh issued a warning this week that unless commodity prices rise, or interest rate expectations increase further, the Aussie is overvalued.

Commodity prices, measured by the Reuters Jefferies commodities price index, have risen 7.4 per cent since end of June, while the equities markets continue to rally.

Arab Bank Australia treasury dealer David Scutt said the Aussie dollar is being driven by the equities rally, which has sent the ASX-200 as high as 37 per cent since March 6.

Technicals would suggest there’s a cap on it of about 85.20 US cents, he said. But given the performance of equities, I am not particularly sure that it can sustain any push higher from that level.

It will need sustained gains in the equity markets and I’m not sure that will actually occur in the period ahead.

The Australian dollar has also benefited from the relative health of the Australian economy compared to other developed economies around the world.

The pace of growth in Australia, which has a direct influence on rate moves, also makes the local currency more attractive to global investors.

Australia’s economy grew by 0.4 per cent in the first quarter and is on track to expand again in the second quarter of the year.

Jobless rate

A lower than expected unemployment rate due this afternoon could vault the dollar higher today, said one analyst.

The jobless rate, to be released at 11:30, will give a better idea of the economy’s health and the need for interest rate hikes in coming months.

If the unemployment is unchanged at 5.8 per cent today, or only rises to 5.9 per cent and full time employment doesn’t fall by more than 10,000, I’d think we can have a crack at 85 US cents, said 4Cast Ltd’s chief economist Ray Attrill.

However, if the jobless number comes in higher than expected, at 6 per cent or higher, the Aussie could suffer, he said.