27 May 2014
AUD’s overvaluation overview - BAML
FXStreet (Guatemala) - Adarsh Sinha, FX Strategist at BAML suggested that the depressed level of both realized and implied volatility in the AUD exchange rate can be at least partly attributed to the firmly neutral Reserve Bank of Australia (RBA).
Key Quotes
"The depressed level of both realized and implied volatility in the AUD exchange rate can be at least partly attributed to the firmly neutral Reserve Bank of Australia (RBA). Not only has the RBA clearly stated that the cash rate is likely to be on hold for some time but it has also dialed down its rhetoric on currency moves, in particular no longer referring to it as "uncomfortably high" this year."
"Our economists maintain their view that rates will be unchanged for the foreseeable future. What will it take to change the RBA's recently benign view on the exchange rate?"
"In February, we argued there were three good reasons the RBA stopped talking down the AUD: potential pass through to tradables inflation, diminishing market impact of verbal interventions and valuation. With the AUD trade weighted index having appreciated since then, we reassess the valuation case, specifically using our version of the RBA Market Analysis division's "preferred error correction model" for the real trade weighted index (RTWI)."
"Our key conclusion is that while the AUD's overvaluation has increased over the past couple of months, it is likely to take a further decline in Australia's terms-of-trade and/or real rates relative to other countries for the RBA to view it as inappropriately high. We quantify this within the RBA's framework."
Key Quotes
"The depressed level of both realized and implied volatility in the AUD exchange rate can be at least partly attributed to the firmly neutral Reserve Bank of Australia (RBA). Not only has the RBA clearly stated that the cash rate is likely to be on hold for some time but it has also dialed down its rhetoric on currency moves, in particular no longer referring to it as "uncomfortably high" this year."
"Our economists maintain their view that rates will be unchanged for the foreseeable future. What will it take to change the RBA's recently benign view on the exchange rate?"
"In February, we argued there were three good reasons the RBA stopped talking down the AUD: potential pass through to tradables inflation, diminishing market impact of verbal interventions and valuation. With the AUD trade weighted index having appreciated since then, we reassess the valuation case, specifically using our version of the RBA Market Analysis division's "preferred error correction model" for the real trade weighted index (RTWI)."
"Our key conclusion is that while the AUD's overvaluation has increased over the past couple of months, it is likely to take a further decline in Australia's terms-of-trade and/or real rates relative to other countries for the RBA to view it as inappropriately high. We quantify this within the RBA's framework."