The Australian dollar has been on a tear in recent months, and not just against the US dollar.
However, not everyone thinks the recent strength has been justified.
According to modelling from by the National Australia Bank’s FX strategy team, the Australian dollar is currently overvalued by around 10% on a real trade-weighted basis.
This chart shows the Aussie’s current overvaluation based on the NAB modelling.
The NAB says it attempts to imitate the RBA’s own methodology for evaluating the Aussie’s valuation, describing the recent disconnect as something that should be “concerning” for the RBA board.
And, given the threat the higher Aussie dollar may present the wider economy as it continues to transition away from the mining investment boom, the NAB says there’s now an increased risk that the RBA may voice its displeasure at towards its recent strength.
“Certainly we now look to be in territory where the RBA has in the past been more vocal about its displeasure at AUD levels,” it says.
“It is also at overvaluation levels where the RBA has in the past adopted an explicit easing bias or been cutting rates — not that we are looking for that now (given) the bar for lower rates is set very much higher than in 2015-2016.”
Essentially, with several RBA members speaking publicly this week, there’s a chance that the RBA may attempt to “jawbone” the Aussie lower, mirroring what it has done in the past whenever the bank deemed valuations and fundamentals to be getting a little out of whack.
For several months the RBA has been warning that an appreciating exchange rate would “complicate” Australia’s economic transition.
Along with the prospect of renewed jawboning should the Aussie continue to climb, the NAB says even with its recent strength, it’s not yet ready to abandon its call for the AUD/USD to finish the year buying 70 US cents.
“While every cent higher in AUD/USD makes a fall to 0.70 look less achievable, there remain plausible circumstances that could bring the currency down rapidly,” it says.