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AUD getting a little ahead of itself? – Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 30, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Robert Rennie, Research Analyst at Westpac, notes that the A$ is currently trading barely within my measures of fair value.

    Key Quotes

    “Indeed, the low end for my fair value range sits at 0.76 and the upper end at 0.80. Now there are a number of caveats here. This is short term and coincident fair value as opposed to forecast fair value. I also use a range of observable market indices - commodity prices, measures of interest rate differential, risk sentiment and some measures of flow/ positioning. Finally, given that I use 10 different models here, I trim the range to exclude extreme highs and lows.

    However, if my sense is that commodity prices (iron ore) are being pushed higher by speculative activity and that markets are under-pricing the Fed, then by definition, my range of fair value is too high. If I assume iron ore is headed back below $50 and markets should be pricing in a 50% probability of another Fed hike this year, then the range drops to 0.73/ 0.7650 (ignoring any associated lift in measures of volatility or shift in terms of flow and demand).

    If we assume iron ore does fall below $50, but no change in Fed pricing, then the range sits at 0.7350/ 0.77. That suggests that the current AUD price sits towards the upper end of where I think it should be (though it could extend up towards 0.78) given where I see asset markets headed over the next couple of months.”
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