- Since September, the Australian dollar has remained broadly steady at a little above 70 US cents. Evidente's econometric model of the currency shows that at current levels, the A$ is trading broadly in line with fair value. After what had been strong out-performance for a little over three years, ASX listed US dollar earners have under-performed in the past year. Despite the 10% depreciation in the A$/US$ over this time, the overweight bet in offshore earners has remained a crowded trade.
- From a longer term perspective, the Big Mac index suggests that the A$ is under-valued against the US$ by 25%, which represents the biggest under-valuation since 2003 (see chart). Deviations from purchasing power parity can extend for long periods. But short-sellers of the Australian dollar should be cognisant that recent currency gyrations reflect primarily US$ over-valuation. At present, the US$ is over-valued against all but three currencies based on the Big Mac index, notably the Swiss franc, Swedish krona and Norwegian krone.
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