The RBA Governor ramped up the rhetoric on the Aussie dollar in his statement after the Board meeting earlier this week saying that “The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices”.
This is a different tact to what he has been saying lately which is that the Aussie dollar “remains high by historical standards, particularly given the declines in key commodity prices”.
The problem with the Governors changed rhetoric however and his implicit entreaty for investors to have a look at their models of value for the Aussie dollar is that the evidence appears contrary to his rhetoric.
We asked the Heads of foerign exchange strategy and Westpac and the NAB on how their models see the Aussie dollars value.
Ray Attrill from the NAB said:
Our ‘traditional’ fair value model is giving us short term fair or present value around 0.9450 (see below). This is up from around 0.9300 a month ago, with ALL of the rise in fair value coming from the fall in the VIX (from 17 to 12). So it is telling us that while volatility remains so low, the risk-adjusted carry trade attractions of the AUID is continuing to trump influences such as the terms of trade, which is being led lower by iron ore.
Having said that the NAB does expect that the falling terms of trade will eventually drag the Aussie dollar lower. Just not at the moment.
Westpac’s Rennie agrees that its the interest rate differential which is supporting the Aussie dollar saying that “the A$ will continue to attract yield related demand that could support it even as the US$ inevitably starts to push higher”.
Our fair value model suggests it would take a significant shock (commodity prices 8% lower and an RBA rate cut versus median forecasts) for the A$ to start to challenge and break the 0.90 level early next year. Assuming neither event takes place, it is likely that forecasts start to become more upbeat through the second half of next year.
Bottom line, many market commentators tend to assume that the beginnings of policy normalisation in the US, which is likely to be seen at some point in 2015, implies a stronger USD and therefore a lower A$. Our simple fair value analysis suggests this is not consistent with consensus asset market forecasts. It’s likely that the A$ will continue to be well supported against the US$ by yield related demand. We find it difficult to see much below 0.92 in the near term and are looking for opportunities to buy AUD on dips.
It looks like Governor Stevens is going to be writing about a high Aussie dollar for many months to come.