NAB: The Aussie dollar is 'undervalued'

Getty/Matt Cardy

The Aussie dollar has been doing well recently — against the odds and against expectations from the RBA and across the economic forecasting community.

Just this morning RBA Governor John Edwards told at a CEDA breakfast that the Aussie dollar is still too high.

But there’s a difference between perception and reality according to the NAB’s global FX strategy team, who this morning released a report saying the Aussie dollar is at best fairly valued but more likely undervalued.

Of course valuation — like beauty — is in the eye of the beholder. Some economists and forecasters like very long term measures like PPP or the REER which has recently got BoJ Governor Kuroda into hot water.

Then there are methods favoured by many which are short to medium term in nature and help forex strategists and traders identify what might be termed “coincident” valuations as opposed to the longer term measures discussed above.

It’s in using these more market-focused valuation tools to generate the valuation which the NAB says is below what their model anticipates the AUSUSD exchange rate “should” be trading at.

The AUD/USD remains undervalued, according to our present value model based on interest rate differentials, commodity prices, market risk and gold prices. NAB’s long term valuation tool ,
shows that the AUD on a real trade weighted basis, is indeed close to fair value. These factors suggest that there are fewer forces pulling the AUD strongly lower from these levels.

The fact that traders were already selling US dollars, even before the “dovish” FOMC statement last week, only highlights the NAB’s point that in the short term the Aussie dollar might have the potential to rally further.

That is unless risk appetite falls off a cliff. The NAB, like everyone else, are watching Greece closely.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at