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5 May 2015
AUD overvalued, may find support ST - Nomura
FXStreet (Bali) - Charles St-Arnaud, Global FX Strategist at Nomura, notes that while AUD remains overvalued and should depreciate in the medium term, some factors could support the currency in the short term.
Key Quotes
"We maintain our view that AUD is overvalued because of the current level of commodity prices and that AUD should depreciate in the medium term. However, some factors could support AUD in the short term."
1. With the RBA signalling that it will stay on hold for some time, we could see some further repricing of the rates curve. The curve is currently pricing in almost a 50% chance of a cut by September.
2. Positioning remains short AUD despite the reduction in USD longs. With the RBA signalling a period of stable policy rates, a further reduction in AUD shorts is likely. Furthermore, if the US data remain on the weak side, we could expect to see some further USD consolidation and depreciation.
3. A period of stability in the policy rate could trigger an increase in inflows into AUD assets. In the past foreign investors, especially Japanese investors, have tended to accumulate AUD assets when monetary policy is neutral, especially given the yield differential remains in favour of AUD assets. Moreover, the fact the RBA is not pushing more forcefully for further depreciation may suggest to some investors that the risk of a loss on their holdings of AUD investment owing to a weaker currency has diminished.
"With all this in mind, AUD could be well supported in the short term and that it may take some time for AUD to converge towards weaker fundamentals. Nevertheless, in the medium term, we believe that AUD should depreciate. However, this may need either a string of weak data in Australia or, in the case of AUD/USD, some positive data out of the US, leading to some repricing in the rates market there."
Key Quotes
"We maintain our view that AUD is overvalued because of the current level of commodity prices and that AUD should depreciate in the medium term. However, some factors could support AUD in the short term."
1. With the RBA signalling that it will stay on hold for some time, we could see some further repricing of the rates curve. The curve is currently pricing in almost a 50% chance of a cut by September.
2. Positioning remains short AUD despite the reduction in USD longs. With the RBA signalling a period of stable policy rates, a further reduction in AUD shorts is likely. Furthermore, if the US data remain on the weak side, we could expect to see some further USD consolidation and depreciation.
3. A period of stability in the policy rate could trigger an increase in inflows into AUD assets. In the past foreign investors, especially Japanese investors, have tended to accumulate AUD assets when monetary policy is neutral, especially given the yield differential remains in favour of AUD assets. Moreover, the fact the RBA is not pushing more forcefully for further depreciation may suggest to some investors that the risk of a loss on their holdings of AUD investment owing to a weaker currency has diminished.
"With all this in mind, AUD could be well supported in the short term and that it may take some time for AUD to converge towards weaker fundamentals. Nevertheless, in the medium term, we believe that AUD should depreciate. However, this may need either a string of weak data in Australia or, in the case of AUD/USD, some positive data out of the US, leading to some repricing in the rates market there."