David Bassanese takes up the Australian dollar baton today and does a good job of it:
The resilience of the Australian dollar in recent months has been surprising, particularly given export commodity prices have resumed their slide.
Only more surprising is the fact that the Reserve Bank of Australia has gone relatively quiet on the jawboning front, even though by my estimates – using the RBA’s own forecasting framework – the $A is now as overvalued as it was in late 2012, when still hovering above parity to the US dollar.
Indeed, based on Treasury’s latest terms of trade forecasts – contained in this past week’s budget papers – I estimate fair value for the $A this quarter is now closer to US80¢.
…All up, Treasury estimates that by 2017-18, the terms of trade should have fallen to around their 2006-07 levels – or about 10 per cent below the estimate level for the current quarter.
And to be conservative, Treasury estimates the terms of trade will fall another 7 per cent in the two years to June 2020.
If the valuation model holds up, this would have $A fair value closer to US76¢ in June 2018 and US72¢ by June 2020.
Yep and the clear risk is the ToT falls arrive earlier as China slows, though perhaps not deeper.
Why is the RBA silent? A range of reasons:
- they’re obsessed with inflation above all else, even when it’s transitory;
- they continue to operate in a Pitchford framework that makes no qualitative judgements about growth;
- they still hold to their ‘Chinese growth forever’ doctrine;
- they are risk averse when it comes to policy reform, intellectually rigid, and happy to fight the last war, or
- they all own investment properties.
I don’t rightly know but Bassanese is right and the RBA wrong.
