Is the Australian dollar headed back to parity with the USD?

Readers may have seen an article in Fairfax media this morning, in which Saxo Bank’s chief economist, Steen Jakobsen, was reported as making a number of predictions for the current year.

First, he expects the Australian dollar (AUD) to head back to parity with the US dollar (USD). One AUD currently buys about US$0.75.

Second, he expects the Reserve Bank of Australia to begin raising rates. Mr Jakobsen reportedly stated that Australia’s divergence with US monetary policy was unprecedented, and while the first 25 basis points (0.25%) could go either way, the following 50 basis points of rate movements would certainly be up.

A higher Australian dollar would take the wind from the sails of companies like Westfield Corp Ltd (ASX: WFD), QBE Insurance Group Ltd (ASX: QBE), and Cochlear Limited (ASX: COH), which earn a majority of their revenues overseas. Cochlear in particular enjoyed a significant boost to its profits from currency effects recently.

Higher Australian interest rates would also be a mixed bag for many businesses as well as individuals. Individual debt is very high compared to historic levels and higher interest rates could put downwards pressure on consumption, and potentially lead to rising levels of bad debt at the likes of Commonwealth Bank of Australia (ASX: CBA).

Businesses like Retail Food Group Limited (ASX: RFG) and Scentre Group Ltd (ASX: SCG) use low interest rates to drive their expansion, and Scentre Group in particular is vulnerable to seeing increases in operating profit nibbled away at by rising interest rates. Higher rates would be a boon for insurers like QBE and Insurance Australia Group Ltd (ASX: IAG) though, delivering a significant increase in profit as a result of rising deposit yields.

Of course, neither prediction may come to pass as Mr Jakobsen has previously made other outlandish calls, including predicting a return to US$100/barrel oil just over 12 months ago.

If, however, he’s aiming to be generally right rather than specifically wrong, he’s doing well as both oil and the Australian dollar have risen since he made his predictions. Could higher interest rates be next?

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Motley Fool contributor Sean O'Neill owns shares of Retail Food Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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