All this talk about Australian Dollar and US Dollar parity got me thinking about the behaviour of the Aussie relative to other assets, namely the sharemarket. The above chart shows that, with the exception of the first half of 2008 when the the sharemarket was a little more forward thinking than the RBA, there has been a fairly strong correlation between the sharemarket performance and the Aussie dollar. Basically both of these ‘plays’ are risk trades and the correlation over the last two and a half years has been very high.
So whilst the RBA and the bond market is currently talking up a rate rise which will most likely bring sufficient AUD strength to bring parity with the US Dollar, it is the global willingness to accept risk that will ultimately determine whether parity holds or not. For example, if global sharemarkets start to plummet because the Greek Crisis has turned into a Greek and Irish Crisis so too will the Aussie dollar decline…irrespective of the RBA’s talk of inflation and interest rate rises.