NAB: The Aussie is overvalued and staying that way

Photo: Keystone Features/ Getty Images.

As it has been for much of the past two months, the Australian dollar remains overvalued.

However, following the US Federal Reserve’s September FOMC meeting, held last week, that trend looks set to “stay that way”.

That’s the view of the National Australia Bank’s FX strategy team, headed by Ray Attrill, which believes that the inaction from the Fed will keep the AUD/USD “ensconced within a 0.7450-0.7750 range which has contained close to 100% of the price action since the beginning of August”.

“AUD/USD looks set to end the quarter not too far from our earlier 0.77 forecast and we see no compelling reason at this stage to alter our end-2016 forecast of 0.75,” says the NAB. “We’re not convinced the prevailing range is under any imminent threat of breaking.”

In the NAB’s opinion, the Aussie is around 2 cents above its own short-term fair value model estimate, and “significantly above the RBA’s own view of the (real) trade weighted AUD that would be consistent with the scale of the terms of trade decline since its 2011 peak”.

By “significant”, the NAB estimates that it is around 8% overvalued based on RBA modeling.

While the NAB believes that the Aussie is currently overvalued, it suggests that if there is a risk to the Aussie breaking out of its current trading range, it’s likely to be breaking upwards.

“Post-Fed, and with market volatility set to stay low at least until we get much closer to the US Presidential elections, we’d have to judge the top side as currently the weaker edge,” it says.

Mirroring the sentiment expressed by the NAB, Citibank’s Australian economics team — comprising Paul Brennan, Josh Williamson and Vivian Jiang — wrote last week that while the Aussie dollar is currently overvalued by around 5%, it’s unlikely to weaken materially any time soon.

“AUD real exchange rate is still overvalued according to our fair value model,” Citi wrote.

“The result suggests that the real AUD TWI is overvalued by around 5%. However, anyone expecting a significant fall in the exchange rate is likely to be disappointed, with our modelling showing the fair value continuing to pick up to end-2017 and effectively putting a floor on potential depreciation.”

The AUD/USD currently trades at .7610.

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