RBA Commodity Prices Suggest The Aussie Dollar is 10% Overvalued

The RBA’s latest Commodity Price Index has been released for March and shows that in Aussie dollar terms, the index has declined by 2.6%.

This largely reflects the increase in the value of the Aussie dollar across the course of the month, as in SDR terms (Special Drawing Rights – the virtual IMF currency of central banks) the index only declined by 2.0%.

In the wake of the governor of the Reserve Bank’s statement yesterday that the Aussie dollar was high by historical standards, it’s worth wondering if this index, which was updated in March to reflect actual exports, might be able to give an estimate of the difference between where the Aussie sits now at 0.9260 and where this “historical standard” might rest.

Using the high of the Aussie in the May/June period in 2011 which corresponded with the highs of the Commodity index (thus the Aussie wasn’t substantially overvalued), we can see that in SDR and USD terms the index is down 27.45% and 29.80% respectively – but it’s only down 17.95% in Aussie dollar terms.

If we take the difference in the falls between the Aussie dollar value of the index and the SDR value of the RBA Commodity price index and assume that this is what the RBA means by “historical standards”, we get a difference of 9.5 percentage points.

Subtract that from the current spot and you end up with a price of 0.8380.

That’s not too far from Glenn Stevens oft-quoted 85 cents as being “about right” for the Aussie US dollar exchange rate.

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