“The RBA may be right to suggest that a lower AUD would promote more balanced growth, but its claim that the AUD remains overvalued rings hollow.”
That’s what Ray Attrill, the NAB’s co-head of Currency Strategy says in a new note to clients.
Attrill believes further AUD weakness “is justified only if key fundamental drivers move further against the AUD”.
That’s not to say he’s an Aussie dollar bull. He’s expecting further Aussie dollar weakness in the year ahead.
But Attrill believes the RBA is over-egging its claim the Aussie dollar has “remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices”.
“…it is somewhat disingenuous to simply compare changes in commodity prices with changes in the currency and implicitly suggest they should somehow equate. Between 1998 (the start of the China-driven ToT boom) and its 2011 peak, the ToT improved by over 100% yet the AUD TWI appreciated by only about 50%.”
Arguably then, “the decline in the AUD TWI from its 2013 peak could be said to be exaggerated,” Attrill says.
He also highlights that in both AUDUSD and TWI terms the Aussie is back at post-float averages.
That’s important context.
The Aussie dollar, and TWI, at long-run average levels should be a strong net positive to, and beneficial for, Australian businesses and the economy in their own right. This is working through the economy now.
Attrill then walks through a number of “valuation” models, including the RBA’s favourite, and finds no signs of overvaluation.
“Whether we use a variant of the RBA’s preferred AUD valuation models, our own short term fair value estimates, or longer term PPP-type modelling, all lead to a similar conclusions. The AUD at present looks quite fairly priced both against the USD and in trade-weighted terms.”
But in the end, Attrill sympathises with the RBA’s desire to get the Aussie dollar lower, especially in the context of improving the employment outlook.
He says “rising US interest rates relative to Australia will generate additional US dollar strength and because we foresee another 5% or more decline in Australia’s Terms of Trade from end-2014 levels” the Aussie dollar will continue to fall.
At the moment however, the Aussie no longer seems especially overvalued.