More bad news for RBA Governor Stevens on the Aussie dollar front today – this time from the Currency Strategy team at the NAB who reckon that if you take into account the Fed’s bond buying program that the fair value level for the Aussie dollar US exchange rate moves up toward parity.
The NAB FX team has two models that they publish. One has inputs you might call “observable” – things like the Gold price, 2 year swap spreads, industrial metal prices and investor risk appetite. The fair value on this model is around the spot price as it was this morning just above 94 cents (current price closer to 95 cents) .
The other model is a bit more academic and is based on work done by the NAB team and an RBNZ economist Leo Krippner which takes into account the Fed’s unconventional monetary policy and which suggests that fair value is around parity.
Currencies are and have always been difficult to value if for no other reason than trying to determine what is a “fair value” when there are no associated cash flows, earnings or balance sheet in the manner of companies and their accompanying stock prices. The IMF and others have Purchasing Power Parity which takes into account long term trends in inflation rates and is ignored by any one other than academics and certainly hardly if ever used by traders.
The Economist magazine has its Big Mac index where it tries to use the price of the ubiquitous Big Mac in many countries to work out over and under valuations. Likewise Craig James and the team at Commsec have build a currency index and measurement tool based on the equally ubiquitous Ipod and the differences in cost afre used to explain currency misalignments.
The latter two might be a half serious bit of fun but NAB’s “Krippner” model is a deadly serious endeavour which tries to capture the impact of the Fed’s monetary policy and bond buying on currency values.
The NAB makes the point that US bond prices and interest rate differentials aren’t as strong a driver of the AUDUSD rate now as they were in the recent past. But till the model does suggest that when the Taper, or non-Taper, is taken into account fair value for the Aussie is 5-6 cents higher (blue line we added to the chart of the model from the NAB) than the traditional observable price model suggests.
It’s exactly the point Mike Smith made over the weekend and unless the RBA wants to surprise with a cut tomorrow or on the first Tuesday in December then it seems like the stronger data flowing through at present for the economy might just keep the Aussie dollar more elevated than martin place would like.
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