The AUD has sailed through levels, which would be considered fair relative to domestic economic fundamentals and has begun to provide a stimulatory tailwind to the non-mining economy, notes Australia and New Zealand Banking Group (ASX:ANZ).
"The AUD is now overshooting fair value and is moving in to territory that is outright stimulatory for the non-mining economy, and is also getting increasingly close to levels at which it is also stimulatory, rather than a shock absorber, to the mining sector. Our current estimate of fair value is USD0.72," ANZ clarifies.
Key Takeaways
- 1- Overshoots are not uncommon for the AUD.
- 2- Previous instances when the AUD has overshot suggest that a reversal at this point in the cycle is unusual.
- 3- In those instances when we have seen a turn at this point it was at a time when the fundamental backdrop was becoming unambiguously favourable and where fair value was starting to trend higher.
- 4- The turning points have also come at a point where Australian assets were trading at a discount to global assets, they are currently still at a premium.
- 5- The overshoot is still justified by global circumstances and by the softer, more volatile growth outlook in particular.
- 6- Domestic and global circumstances suggest caution in trying to pre-emptively pick a positive turn in the global environment," ANZ argues.
"All of the above analysis points in one direction and raises the risk that until we can confidently forecast (and likely have to observe) a more robust recovery both in Australia and in Asia further overshoot is likely... We retain our forecast of a trough in the AUD at USD0.67, however believe that the risks of further downside remain significant," ANZ concludes.