David Bassanese, late of the AFR and now chief economist of exchange traded fund provider BetaShares, has released a report saying that the Aussie dollar could fall to 70 cents against the US dollar by 2020 “based on past relationships between the terms of trade and the real exchange rate”.
It’s a big call but one that fits with Bassanese’s new role, given BetaShares sells the very financial products that investors can use to profit from such a decline.
But that is not to say that Bassanese’ thoughts on the Aussie aren’t without merit. Rather, they appear to align with the RBA’s public prognostications and using the RBA’s valuation methodologies, Bassanese says “our estimates suggest the $A is now around 16% overvalued or close to the highest levels of overvaluation in the post-float period.”
Certainly the Australian economy appears to need a lower Aussie dollar to help rebalancing and the RBA appears frustrated that it has not fallen as expected.
But as CBA chief economist Michael Blythe pointed out, the surge in the volume of exports and the impact on the trade balance is potentially complicating previous relationships such as those that existed in the mid 1990’s when the Aussie dollar last experienced a period of overvaluation such as it is now.
Bassanese thinks that based on the RBA’s model, 82 cents seems a more appropriate level. Many Australian businesses and the RBA might agree with him.