What’s fair value for the Australian dollar?

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Find below a new note from Westpac discussing Australian dollar fair value.

Er 20130626 Bull Aud Fair Value Update

Comments

  1. GunnamattaMEMBER

    Good analysis. Comprehensive. I just disagree with the implications of it.

    If fair value for the AUD is circa USD 0.90 when Australia is going to be exporting a lot of jobs.

    • migtronixMEMBER

      Maybe? But when? I guess if yields keep rising as they should and the average variable mortgage rate goes to something like 7% I can a lot of os investors clearing RE risk and dumping the aud to something like the mid 70s. If this happens banks would get crushed finally

      • thomickersMEMBER

        on any day by end of this year (according to my forum post).

        I expect the China credit issues to materialise.

        but I am no oracle and I am a poor timer of the market.

  2. The first question we really need to ask is what does ‘Fair Value’ mean. If one reads the Wiki definition it doesn’t include the ability to borrow to finance consumption.

    Westpac’s Fair Value is the value at which they deem we can still borrow to fund consumption.
    “The extraordinary external financing resilience that the Australian economy exhibited through 2012 had both cyclical (temporary) and secular (permanent) components.”

    That seems a weird kind of Fair value to me but then there are others who would suggest I’m a bit weird myself.

    ‘Fair Value’ for the A$ should be the value at which we no longer run a CAD. We would have a balanced external account. It could be well argued that ‘Fair Value’ should be the value at which we run a considerable CAS since what we are selling is largely non-renewable.

    If we are ever going to try to get the economic and social policies right we at least need to start ‘calling a spade a spade’ Even better call the spade a bloody shovel and get on with it.
    The baloney speak of the likes of Westpac, RBA and Treasury do not advance the fundamental understanding of our problems.
    Personally I think they are all being deliberately deceptive but that’s just me and my tinfoil hat.

    • From my experience most Aussies could care less about the depletion of their natural resource base. They care much more about their Centerlink checks and the price of beer and petrol than they will ever care about the rapidly decreasing quality of residual ore deposits. Measuring CAD/CAS without taking into account the asset depletion is bogus accounting, if I did this with my companies accounts they’d simply call it fraud and it s no different at a national level.

      • pingupenguin,

        You too are wondering how “I couldn’t care less” can morph to “I could care less”. My theory is that it’s American Jewish ironic.

        “Gee you have a bill of $1000 to pay!”

        “Yeah,I should worry!”… which actually means the opposite: “That’s trivial” – because my total debt is over a million.

        It should be “I could care less” + emoticon for irony, if there is one.

  3. I’m at the point where I feel the Australian Dollar exchange rate is almost irrelevant to most of my business decisions.

    If my markets are global and USD denominated and my capital is raised in USD, what costs are really AUD affected. Basically Wages, Rent and Taxes. For many of the businesses that I have looked at, I will need to hire foreign experts because Oz has very few home grown engineers (and an even smaller number of world class engineers). My critical wages are therefore not in $AUD, so it really comes down to Rent and Tax. Interestingly both Taxes and Rent are too high to make Australia attractive as an investment location. Unfortunately the burdens they impose move in opposite directions. For a static business (USD based) (no growth/no decline) my rent goes down (as the AUD depreciates) but my Aust Taxes go up and they go up dramatically. This introduces earnings volatility (for the investment stakeholders) that does not exist in the underlying business/market. Wow just what I need extra uncontrollable Beta.

    • Dammit Bob! Why are you around pouring buckets of cold reality on everything???
      That’s not how we want to view things. Our rose coloured glasses are fine…..for the moment!

  4. Disclaimer: I have no idea!

    I cannot see the dollar get below 85c any time soon.
    I cannot imagine how the average income earner will like seeing dramatic increases in the cost of USD denominated imports.

  5. The TWI will come down to its historical level eventually, and bring the AUD with it. So, over the next few years it will fall to around USD0.60…maybe less.

    By the way, the last time the growth in the global economy dropped to 2% pa, the currency fell very quickly. This suggests the currency will continue to fall this year. There is a good chance the TWI will fall by 15% in the coming 12 months, taking the currency to USD0.75 by this time next year.

    • migtronixMEMBER

      “by this time next year”: maybe faster if yields widen quickly. Thomickers is looking for USD0.7 by year end. I’m not that bold but it could certainly happen if, as he says, China credit tanks properly and everything owned by a chinese investors is liquidated to in order to post more capital against levered positions