Is The Australian Dollar overvalued?

Philip Lowe, the Governor of Reserve Bank Australia was asked this very question at the A50 Australian Economic Forum dinner on Thursday evening, in an upbeat reply stating “it’s hard to say the exchange rate is fundamentally too high with current global outlooks and interest rates”. On the back of these comments Friday saw Sterling reverse the 2-cent inroad it had made against the Australian Dollar earlier that week on Tuesday, retreating back to the mid 1.62 levels we have become accustomed to.

Further support for Philip Lowe’s statement came from Westpac (one of Australia’s top four banks) chief currency strategist and economist Robert Rennie. Using a variety of interest rate differentials, commodity prices and measures of risk he modelled a ‘fair value’ for the Australian Dollar, determining the currency is in fact slightly undervalued at present. However, Mr Rennie did acknowledge if any changes are seen to the US interest rate there would be a significant impact on his calculations.

US-AU Interest Rate differential

Over the past year Australia has been seemingly detached from the turbulent time in the remaining developed world, seemingly unaffected by the rise of populism sweeping across America and Europe. It has been due to this immunity and the RBA’s 1.5% interest rate that Australia has benefitted from large capital inflows, becoming the recent safe-haven currency for many investors.

Will Australia begin to struggle when the interest rate differential between America and Australia narrows? With a minimum of two US fed interest rate hikes this year each at 25 basis points looking likely, if you have a AUD selling requirement it may be advisable to lock in your exchange rate while the Australian economy is still strong through the use of a forward contract. Contact your account broker here at Foreign Currency Direct to learn more about the wide range of options available to you.

Economic data releases this week

On Tuesday, we see Westpac Consumer Confidence released at 11:30pm, capturing the level of sentiment individuals have for their family finances over the past and coming year. Thursday, we have Consumer Inflation Expectation for February released at 00:00GMT, followed by Employment Change and Unemployment Rate for February at 12:30am and finally Participation Rate for February released at 1:30am.

For more information on how future data releases could affect your Australian Dollar requirement, call our trading floor on 01494 725 353 or email me here.

News

Read more articles
Exchange rates on this page are interbank rates and indicate where the market is trading to show the performance of a currency pair. They are not indicative of the rates which we offer. The information on this web site is provided free of charge for information purposes only. It does not constitute advice to any person on any matter. Foreign Currency Direct plc. ("FCD") makes every reasonable effort to ensure that this information is accurate and complete but assumes no responsibility for and gives no warranty with regard to the same.