AUD/USD: RBA to be uncomfortable with aussie above the 0.76 fair value

Once a clear trend has been established, the aussie has a solid history of sustaining the trend for a number of years. Economists at Westpac forecast AUD/USD at 0.76 by end-2021, however, they do see the gap with fair value closing significantly in 2021. In case AUD move substantially above fair value, the RBA will become uncomfortable and may establish negative rates.

Key quotes

“With AUD now four months into what appears likely to be an established up swing history is clearly encouraging us to expect that upswing to be sustained through, at least, 2021 if not considerably further. That outlook is certainly in line with our forecast that AUD/USD will lift consistently through 2021 from 0.72 to 0.76. With fair value currently estimated at 0.77 and spot at around 0.72, there is a 0.05 undervaluation of AUD – fundamentals are consistent with a higher AUD.”

“Our commodity price forecasts are consistent with a AUD/USD fall in fair value next year from 0.77 to 0.75. However, with the risk environment easing significantly through 2021 it seems likely that ‘spot’ can hold above fair value, consistent with our current 0.76 forecast.”

“Our AUD/USD 0.76 forecast by end-2021 has upside risks. If the aussie was to move markedly above fair value the RBA would be less comfortable that AUD is in line with fundamentals. That discomfort is likely to be exacerbated by an unemployment rate around 7.5% and inflation near to 1%. Under those circumstances, the current policy approach, which is to characterise policies to address the currency as ‘extraordinarily unlikely’ might have to be reconsidered. That style of policy includes negative interest rates and currency intervention.”

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