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Matthew Smith has been a business and financial journalist for more than a decade. He previously worked with the Financial Times Group, reporting from New York on company buyouts and refinancing in the wake of the Global Financial Crisis. He started his career reporting on the funds management industry in Sydney.

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Don’t expect $A to dip below parity despite RBA cut

Published 08 May 2013 11:29, Updated 08 May 2013 11:48

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Don’t expect $A to dip below parity despite RBA cut

The RBA’s decision to lower the benchmark interest rate on Tuesday to 2.75 per cent from 3 per cent pushed the value of the Australian dollar lower than it has been in the past 10 months. Photo: Tamara Voninski

The Reserve Bank of Australia used its recent interest rate cut to target the Australian dollar, but currency-exposed businesses shouldn’t expect a magic cure for the high-flying Aussie just yet.

Despite the immediate drop in the value of the $A from above $US1.024 to almost parity and back just below $US1.020, where it was trading on Wednesday, currency strategists believe the historically high $A will not drastically abate.

Currency experts are talking about “technical trading levels” to explain the support for the $A at its current price.

While the RBA’s decision to lower the benchmark interest rate on Tuesday to 2.75 per cent from 3 per cent pushed the value of the currency lower than it has been in the past 10 months, the announcement didn’t push the $A below a point that would suggest it has lost support at current levels.

AUD vs USDSource: Google Finance

“It’s testing and bending the bottom edge of the range, but it’s too early to argue we have seen a decisive break,” says NAB global co-head of FX strategy Ray Attrill..

In the past 10 months the $A has been trading in the $US1.06-$US1.02 range.

The world has watched the Australian dollar strengthen to record highs, breaking parity with the $US dollar at the end of 2010, and confounding foreign exchange experts by continuing to rise even as commodity prices have fallen.

Foreign demand for Australian bonds and currency has underpinned the currency as investors and central banks have been buying the $A to diversify away from the US dollar and because of the perceived safety of Australian assets.

Foreign exchange specialists expect short-term milestones for the $A to be when it breaks through support levels at US$1.0150 and $US1.0115, says FOREX research analyst Chris Tedder.

“These are prices where there will be orders that could stall the downside risk,” Tedder explains.

In anticipation of the RBA announcement, and on the back of rumours that renowned US billionaire investor George Soros was shorting the $A, sellers were piling into the $A yesterday.

“That pressure bent the back of the $A, but we didn’t see a decisive break through the current trading range,” Tedder says.

There is no doubt one of the main reasons the RBA decided to cut rates was to provide relief to businesses struggling against the high Australian dollar, Attrill says.

The central bank hinted more rate cuts could be on the table if the currency stays strong as is expected.

Based on a macro-economic supply/demand perspective, Attrill expects the $A to push just below parity with the US dollar by the end of this year. Based on bidder support for the $A, Tedder has his reservations the dollar will dip below $US1 this year.

The conventional view among economists and currency strategists is the currency will stay at its record highs in the near term.

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