RBA rate cuts required to keep AUD near fair value – Nomura

FXStreet (Barcelona) - Charles St-Arnaud, Research Analyst at Nomura, assesses that AUD TWI is overvalued between 7%-15% when compared to fundamentals, and views the need for rate cuts by the RBA and/or higher US yields to correct the overvaluation by a 10% depreciation in AUD/USD.

Key Quotes

“Despite the depreciation of AUD over the past year, the RBA continues to view the currency as overvalued given the decline in commodity prices.”

“Using various valuation models, we find that AUD/USD is only marginally overvalued (less than 5%), while the AUD TWI is overvalued by between 7% and 15%. This suggests that further AUD depreciation is required for the currency to converge to fundamentals.”

“With AUD/USD only marginally overvalued, most of the depreciation will need to come from other crosses. However, with most other currencies in the AUD TWI expected to depreciate against USD in 2015, this could be hard to achieve. This means that to correct the overvaluation on a TWI basis, AUD/USD may need to depreciate more than 10%, which would be hard to achieve given the strong inflows into AUD assets, and would require higher US yields and/or more rate cuts by the RBA than currently expected.”