Via the excellent Damien Boey at Credit Suisse:
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.