With the AUD/USD down at 61c, we thought it instructive to see how it lines up with macro fundamentals.
We run a “joint parity” framework to estimate the equilibrium level of the exchange rate. In other words, we assume that purchasing power, trade and interest rate parity conditions do not hold in isolation, but do hold together. Therefore:
A 1% increase in Australian CPI relative to US CPI should correspond to a 1% decrease in the AUD/USD if the “law of one price” holds.
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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.
