Here’s some support for my views on the dollar from David Bassanese at the AFR:
The apparent change of heart from the Reserve Bank of Australia this week has probably led some investors to question their strategy of investing more offshore to take advantage of the weakening Australian dollar.
I would hold your nerve…it’s still far more likely than not that the $A falls further from here and I’d be targeting about US82¢ to US83¢ by year-end. The RBA appears to have stopped talking the dollar down for two reasons. First, the Aussie has finally fallen to a more fundamentally justified level…Second, the RBA is more confident that the $A could now fall of its own accord, especially as the US Federal Reserve has finally started to tighten US monetary conditions, which will raise global interest rates and ease foreign investor demand for the still high yielding Aussie.
However, while relative interest rates differentials help drive currency movements, especially over the short term, statistical models suggest commodity prices remain by far the major driver in the longer term…The goods news for those counting on a weaker dollar is most experts expect commodity prices to continue the trend decline evident since late 2011.
I guess I’m an expert then. To underline Bassanese’s point, here’s a chart from Goldman illustrating the ongoing overvaluation:
It was pretty extreme for a while and big error by the RBA to let it get there.
