Australian, New Zealand dollars are overvalued warns RBS
- Written by: Will Peters
David Petitcolin at RBS FX Strategy says:
"We present a set of long-term drivers for G10 and 21 Emerging Market currencies.
"The long-term drivers are compiled into a naïve composite score which provides an objective estimate of the degree of long-term under/overvaluation.
"Our favoured long-term FX basket: Long RUB, MYR, KRW Short GBP, NZD, IDR
"G10 – Undervalued: NOK Fair: SEK, CHF, JPY Overvalued: USD, EUR, GBP, AUD, NZD, CAD
"Based on their naïve composite scores, the G10 currencies remain rich from a long-term perspective.
"The AUD and NZD stand out as the most expensive amongst the G10, while the Scandis sit at the other end of the spectrum on the fair to slightly cheap side.
"Perhaps most interesting, however, is that while the NZD looks to have cheapened slightly since the last update, the AUD now appears even more overvalued.
"Support for the AUD from high and rising terms of trade looks to be fading, and it remains very expensive relative to PPP and real historic averages. Meanwhile, the EUR, GBP and USD still look modestly overvalued, with little change over the quarter.
"The CHF also remains just a touch expensive, although a large and persistent currency account surplus continues to offer support. The main mover on the month has been the JPY, with actions by Japanese policymakers to try and stimulate growth and weaken the currency eroding its overvaluation.
"Finally, the NOK is the only G10 currency that appears slightly undervalued, supported by improving terms of trade and a large current account surplus."
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Pound versus New Zealand dollar and Australian dollar today
Today's RBA minutes have lent the AUD a much-needed helping hand.
"The minutes from the RBA’s last monetary policy meeting noted some concerns over the effect that the AUD’s depreciation is having on Australian inflation. Higher inflation could stop the RBA from introducing further interest rate cuts, which would clearly be a positive scenario for the AUD," says Richard Driver at Caxton FX.
This pair is trading at 1.6450 at present but another look at 1.62 could take place in the near-term.
Turning to the New Zealand dollar we see weak New Zealand inflation has failed to leave much of a mark on the NZD.
"Quarterly NZ inflation data came in below expectations last night, which resulted in the lowest annual increase in CPI since 1999. The RBNZ has stated that it has no intention of changing interest rates this year, which could explain the muted response to a significant piece of data. GBP/NZD is trading at 1.9250 and another slide is expected," says Driver.