AUD: Valuation Getting Stretched; What’s Next?

The Australian dollar made a big break, taking advantage of the hawkish RBA minutes. Has it gone too far?

Here is their view, courtesy of eFXnews:

NAB FX Strategy Research notes that AUD/USD spent much of the March-June period significantly undervalued relative to NAB’s Short Term Fair Value model (STFV), before spending all of July above STFV.

“In the past week (indeed since June) the falling VIX has been the main factor lifting our STFV estimates but the rise in spot has gone well beyond this. It’s hard to believe risk sentiment can improve much further (e.g. Friday’s close in the VIX was its lowest since 1993). The likelihood is that at some point in H2, risk sentiment flips from being an AUD tailwind to a headwind,” NAB adds.

What’s Next?

“While every cent higher in AUD/USD makes a fall to 0.70 look less achievable, there remain plausible circumstances that could bring the currency down rapidly (as we saw in August 2015 and January 2016, if for reasons other than a correction from USD undervaluation).

We are not yet ready to abandon our call for 0.70 one side or other of year-end,” NAB argues.