Australian Dollar Hit by Overvaluation Fears, Pound Sterling Breaks Above Key 1.90 Level
- Written by: Gary Howes
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The Aus dollar is forecast to weaken further as the Reserve Bank of Australia says it sees fair value far lower than it currently trades at.
The RBA has once again taken aim at the value of the Australian currency saying the exchange rate is still too high.
In a recent interview RBA Governor Stevens prompted a fresh bout of AUD selling after stating:
“A year ago I said probably 85 US cents was better than 95. And if I had to pick a figure now, I would say probably 75 is better than 85.”
The call prompted the pound / Australian dollar exchange rate (GBP/AUD) to breach the upper end of its 2014 range at 1.90 while the euro also powered higher in sympathy.
These are the best levels for those looking to buy Aussie dollars with their sterling since the start of the year.
Governor Stevens Sends the Australian Dollar Lower
RBA Governor Glenn Stevens lowered his estimate of fair value for the currency against the US dollar to 75 US cents.
Following strong indirect signalling from the RBA via the media that it was prepared to cut rates early next year unless the currency fell below 80 US cents, the governor has given a very long on-the-record interview with the Australian Financial Review.
The governor still strongly wants a lower exchange rate to help cushion the economy from the supply-driven decline in the terms of trade, arguing that fair value has fallen from 85 US cents a year ago to 75 cents.
“This is not surprising given that our version of the RBA fair value model still pointed to the currency being about 10% overvalued as the terms of trade had fallen at a faster rate this year than the exchange rate,” says Kieran Davies at Barclays.
However, it must be noted that Stevens does not appear keen on the prospect of near-term rate cuts.
On policy, Governor Stevens said his diagnosis was that “we’ve got a lot of settings in place for stronger growth” and the “missing ingredient” is confidence, which has been a “little bit wobbly” recently.
He urged the market to take a break and calm down, saying that the RBA would look at things in the new year.
He said he did not want to rule out cutting rates, but added that the RBA would have to judge whether it could construct a “positive narrative” around a cut, highlighting that it would have to boost confidence and that low inflation and a calmer housing market would have to be part of the narrative.
Barclays say their base case concerning the Australian economic outlook is unchanged, although they now think the risk of near-term action hinges on the currency, confidence, inflation and house prices.
“We had been surprised by the extent and strength of the RBA’s indirect signalling and had thought this was a very clear risk to our view that rates remained on hold until the second half of 2015 when we factored in modest hikes,” says Davies.
Barclays looked for clarification on this issue from the governor, given he had given Christmas-time interview last year.
Barclays now see a reduced risk of a rate cut in early 2015, particularly when the AUD has fallen sharply and could well fall below 80 cents by February.
“The RBA may, though, drop the forward guidance of a period of rates stability at that point,” says Davies.
Barclays now also think that the risk of near-term action will be shaped by:
- the currency;
- the Q1 CPI, due late January;
- whether confidence rebounds in the new year; and
- the reaction of house prices to APRA’s macroprudential measures, which they think will have less effect given they are more selective than expected, and where a clean read on house prices won’t be available until after the summer holidays.