Ian Copsey, GFT Forex

To start with, it's worth pointing out that the key factors in the Australian economy at the moment are commodity prices, global growth, developing countries, interest rates and consumer debt.

The impact of commodities on the economy comes through both demand and price; since 2002 the price of commodities has doubled, bringing a significant income boost to the country. Trade is at its highest level in over 50 years and has generated a high level of investment which has spun off onto employment growth and consumer demand.

Equally, the solid growth in the global economy has generated a higher demand for Australia’s commodities, with globalization having boosted demand also from developing countries. These economies now account for 50% of global GDP.

The last major influence on the economy is the level of interest rates and the extent of consumer debt. Over the past 17 years consumer debt has expanded by 8 times to almost A$1 trillion. With the increase in interest rates over the past five years by 2% the level of debt servicing has increased considerably. Around 12% of income on average goes towards debt servicing and the current RBA cash rate is at the highest level for ten years at 6.25%.

Thus any deterioration in any of these four areas will have a detrimental impact on the Australian economy.

Currently I see the Australian Dollar should find resistance around 0.8600. However, overall the rally from the 0.4775 low in April 2001 is marking out a terminal rally. This could still last another one to two years but is unlikely to be direct and should stall around the 0.9000-0.9200 area and I would estimate around the end of 2008 to the beginning of 2009.

Ian Copsey, Senior Foreign Exchange Analyst, GFT Forex

Disclaimers: The views expressed in this article are those of Ian Copsey, a representative of GFT and is not intended as general advice. This does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.