RBA: Australian dollar 4-15% overvalued

The RBA has released a goldmine of analysis on how overvalued is the Australian dollar following a freedom on information request (God knows why this is not on the public record anyway. The market response was obvious though brief, above).

The bottom line is that RBA reckons:

Most models – including the staff’s internal models and the IMF’s models suggest the exchange rate is overvalued by 4–15 per cent…The range of estimates reflects differences in the choice of economic fundamentals and time periods that are used to estimate the ‘equilibrium’ levels.

There are also a series of tables assessing which central banks hold Aussie. Those that do:

Those that might:

And those that don’t:

Plenty more to come on this!

bb6945a8-8132-11e2-a376-1e7653010d54_RBA-document

19 Responses to “ “RBA: Australian dollar 4-15% overvalued”

  1. 3d1k says:

    “…need not imply that its current level is undesirably high, nor that intervention is warranted…”

    And there you have it!

    • And there you have complacency, yes.

    • The Lorax says:

      As long as the consequence is a never-ending recession in manufacturing. Your masters would have you singing a different tune if the AUD was really hurting mining, which it did for a short while last year. I reckon you were about a week away from “new orders” from above when the ore price recovered.

      • 3d1k says:

        Lorax I am fairly ambivalent when it comes to the AUD, swings and roundabouts as I am wont to say. If the current over-valuation is around 4%, impact negligible really, 15% more significant (as we discussed yesterday re fuel costs). The strength of the AUD temporarily hampers some sectors and aids others. Vice versa.

      • The Lorax says:

        Lets face it mate, if ore was at $50 and the AUD at $1.50, you would not be ambivalent.

      • 3d1k says:

        A preposterous scenario.

      • The Lorax says:

        Yeah imagine how it must feel to see the currency double, and not have the price of the products you sell quadruple?

  2. Mav says:

    Call me a cynical b@stard. But I think it isn’t a coincidence this report has been released now, especially after Phil Lowe’s speech.

    Now that the construction sector meltdown is there for all to see, the “we are cutting rates to boost construction to fill mining hole” rationale is wearing a little thin. So it is time for the RBA mandarin to move on to the “we are cutting rates to reduce AUD over-valuation” narrative.

    IMHO, Rate cuts will have no/little effect on the AUD, non-withstanding the counterfactual argument that AUD would have been higher if it weren’t for the rate cuts. It will however have a diminishing return by way of reflation of the housing bubble to fill the mining investment hole, but not by much.

    • LBS says:

      “Rate cuts will have no/little effect on the AUD”

      Especially when most of the western world is at 0-1%. Still a long ways to go. And the fact everyone else is devaluing their dollar.

    • Mav says:

      err.. that was Guy Debelle speaking on AUD, not Lowe.

  3. Deus Forex Machina says:

    HnH did you request this under FDI?

    Just wondering about the context for the release of this info.
    Cheers

    Greg

  4. DSILVR says:

    Let the AUD stay at its current valuation. Once I return from holidays, it can do as it pleases.

    Hahahahaha.

    • Explorer says:

      Don’t you want another holiday next year, and a cheap car the year after that, and a kitchen refurb and new appliances the year after that and petrol every week?

  5. gregcheryl says:

    A little disturbed with the listing at Table 1. Reinforced by the listing at Table 3.

  6. Adz says:

    Are these tables showing countries that hold cash or aussie dollar denominated bonds?

  7. Capitalist says:

    HnH what about the idea that Australia is specialising in its comparative advantages?

    e.g. the manufacturing sector contracts while the mining sector expands. Thus factors of production are reallocated to more efficient sectors (mining) from less efficient sectors (manufacturing).

    I would also say with some of the highest land, wages and electricity prices in the world, the manufacturing sector’s contraction is inevitable.

  8. tobyoptimum says:

    I think we can agree that the high Aussie dollar is a combination of a AAA rating starved world, higher government borrowing and a high TOT. The biggest contribute is the TOT, specifically Iron Ore.

    There are a large number of LNG projects currently under construction and even more under consideration. The demand for the Aussie dollar will increase as these project start exporting. Many predict that these exports will be more valuable than the current minerals exports. Companies may only convert enought US dollar revenue in the Aussie to pay operating costs and taxes, but this is likely to be around 50%. Which is still high.

    Forecasts for the Aussie out to 2015 – 2020 should still be pricing in a dollar that’s around 1:1 US:AUD

    Of course, currency values are the product of so many variables its hard to predict the outcome. But its food for thought.

    Other thoughts?