RBA Unlikely to Alter Language on AUD/USD

Australia’s currency has had one of the most rapid depreciations of its real exchange rate, only beaten by a ragged bunch of troubled economies.  Kieran Davies of Barclays Plc estimates that the Aussie’s 16 percent fall from 2013 to the end of the second quarter is the fastest after Colombia — where growth has halved;  Russia, which is in recession; Brazil, which is also in a slump, and Japan.  All these economies bar Japan are struggling with plunging oil and commodity prices as China’s economy slows.

“Excluding the brief fall at the worst point of the global financial crisis, this is the lowest level since 2007” for the Australian dollar, said Davies, chief economist at Barclays in Australia, who reckons the real exchange rate has fallen a further 3 percent so far this quarter. The depreciation should add half a percentage point to growth this year and next, he said.

Still, Davies, using the Reserve Bank of Australia’s fair value model, estimates the real exchange rate remains 6 percent overvalued this quarter given the larger fall in commodity prices over the period. The central bank’s own commodity price index has dropped 37 percent since the start of 2013 in U.S. dollar terms.  As a result, he thinks the RBA is unlikely to alter its negative language on the currency.