The Australian dollar has sailed through levels which would be considered fair value relative to domestic economic fundamentals and has begun to provide a stimulatory tailwind to the non-mining economy, ANZ says.
The bank’s economists have looked at past periods of currency swings, noting that if history is any guide an overshoot is likely to persist for some time.
“The currency tends to spend more time on either side of fair value than it does actually trading at fair value,” they write in a note, adding that ANZ currently estimates fair value at 72 US cents.
The bank currently sees the currency’s trough at 67 US cents, but sees a downside risk to its prediction that could take the Aussie below 60 US cents.
According to the data ANZ has looked at, the dollar actually spends more than 60 per cent of its time above fair value.
But when the Aussie is on the cheap side of fair value it has a much longer and flatter tail than the opposite, the economists say.
The overshoot has not yet begun. The Australian dollar is falling because it is discounting more weakness ahead in China, emerging markets and commodities, rather sensibly. And yes, we are going to 60 cents next year.
But the overshoot won’t arrive until we’re labouring the 40s as we’re stuck in recession and commodities are suffering from a dose of truly historic market revulsion.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
