NAB: Aussie dollar overvaluation “significant”

From NAB:

“Our calculations suggest that the AUD RTWI (dollar against the trade weighted index, the RBA’s preferred measure) deviation from equilibrium rose significantly in the first quarter, suggesting the appreciation of the currency has reached similar levels where in the past the RBA has expressed a heightened level of discomfort,” Catril writes in a note to clients.

In the previous two periods of overvaluation (see attached chart), the AUD RTWI was effectively not falling fast enough relative to its fundamental drivers and short term dynamics.

Corrections from these periods of overvaluation occurred against a backdrop of broad US dollar appreciation. So although the RBA lowered the cash rate and the currency eventually moved back to its expected medium term equilibrium level, arguably the moves down were also aided by the broad USD appreciation trend.

A renewed level of sustained AUD appreciation could force the RBA to act on its easing bias. If however, this appreciation occurs in an environment of broad USD weakness (as we are seeing currently) driving the currency back down towards its fundamental equilibrium would likely prove to be a tougher exercise than in previous instances.

It is likely to also require evidence of a likely deterioration in economic activity and/or indications that inflation threatens to remain below the RBA’s 2-3 per cent target range.”

Which will come if the dollar doesn’t fall, nicely illustrating the stupidity of the RBA position. Meanwhile, if you’re Aussie shorts are hurting on the pain trade, join the pros, from the AFR comes John Hempton’s latest:

Bronte Capital, the hedge fund behind the “big short” of Australian banks, has posted its worst monthly performance since inception, a negative 4.1 per cent return…The fund, which measures performance in Australian dollars despite investing globally, has delivered investors a return of 6.73 per cent in the past year, and 15.06 per cent since inception.

In its latest newsletter to clients, Bronte said the month’s negative return was largely explained by currency effects with the underlying portfolio up for the month in $US.

“In hindsight we may have been better off hedging at least some of that currency movement – but it is Bronte’s strong view that the Australian dollar will depreciate somewhat in the next few years,” the fund told clients in its newsletter.

…”Our funds are overwhelmingly invested outside of Australia. We have a small short position on Australian financiers but overall we are net long banking and finance globally,” Mr Maher said in an emailed response to The Australian Financial Review.

…Markets are expensive and, at least for now, still going up. We are unwilling to take abnormal risks to produce short-term gains when prices are too dear.”