ANZ: The Aussie dollar is at levels that are 'outright stimulatory' for the non-mining economy

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The Aussie dollar is Australia’s secret economic weapon.

Its falls, and rises, have over the years aided the RBA’s interest rate policy settings by either loosening or tightening monetary conditions within the economy.

These ebbs and flows of the Aussie dollar have been a large part of the Australian economy’s economic resilience. They have contributed strongly to the economic run which has now stretched to 24 years without a recession.

That’s why RBA governor Glenn Stevens was so keen to talk the Aussie dollar lower from late 2013, when it was above 90 cents until recently when his, and the RBA’s rhetoric, changed from suggesting the Aussie needed to fall more to recognising it had dropped as a result of falling commodity prices.

Over the past month however, the Aussie dollar has continued to fall, hitting a low of 0.6893 earlier this month. That, according to ANZ currency strategist Daniel Been, means:

The AUD is now overshooting fair value and is moving in to territory that is outright stimulatory for the nonmining economy, and is also getting increasingly close to levels at which it is also stimulatory, rather than a shock absorber, to the mining sector.

Note that’s not just the non-mining economy but the mining economy as well.

But Been also said that the currency spends most of its time trading either side of “fair value” (which the ANZ currently puts at 72 cents) and the move below 70 cents recently, while into overshoot territory rather than suggesting a snapback, actually suggests that “it is probabilistically likely that the AUD will depreciate further from here”.

That, he says, is because overshoots have proved persistent since the Aussie dollar was floated. Been highlighted that once the Aussie has declined to more than half a standard deviation from
fair value “it will typically decline by one standard deviation or more”.

“In other words, it rarely ever breaks the half deviation fair value range without extending,” he said.

That suggests that the AUD “has more weakness to come”.

“The question is whether a one standard deviation move will be sufficient (ie will USD0.67 be the trough for the AUD) or will we see a move below this level?

“The above analysis suggests than a move below one standard deviation will open up downside for a move below USD0.60.”

In trying to work out the magnitude of the possible fall, Been says it’s not sufficient to simply rely on the past history of price movements as a guide. Rather, when looking at fundamental drivers, he says the broad environment is important and that “the model of this overshoot is also highly related to the global growth environment”.

That, he says, means “the sort of environment we are in at present the AUD has typically overshot fundamentals”.

Summing it all up, Been says the “analysis points in one direction and raises the risk that until we can confidently forecast (and likely have to observe) a more robust recovery both in Australia and in Asia, further overshoot is likely”.

Given he started with a premise that the Aussie’s fall is now at levels that are “outright stimulatory for the non-mining economy” and “getting increasingly close to levels at which it is also stimulatory, rather than a shock absorber, to the mining sector”, that may not be as far away as Been suggests.

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