Currencies | Jun 08 2010
By Rudi Filapek-Vandyck
It was only weeks ago that FX experts at National Australia Bank reported the Australian dollar appeared significantly undervalued with their model indicating an intrinsic valuation of close to parity with the US dollar, yet the Aussie was trading a little above 90c only.
How times have changed during those few weeks.
Today the same FX experts report their model is now indicating the Aussie should be worth 81.40c ("fair value" according to NAB modelling), which is remarkably close to where the currency is at this week. There is one big danger looming though, in case AUD/USD would drop below 0.8110 the market's focus is likely to shift to 0.77, report the experts.
There's more ominous news in NAB's market update on Tuesday morning. Reports the team: "Bouts of severe risk-aversion have lasted 1-3 months over recent years and we’re just one month into the current episode".
Hence why the FX analysts predict AUD volatility will remain high over the next few months, as volatility in stock markets is equally expected to remain high.The analysts note the AUD’s correlation with stock markets has ramped up recently while the currency's correlation with economic growth differentials reflected in interest rates has declined.
On the NAB team's observation, over the past month the correlation of daily changes in AUD/USD with the S&P500 has climbed to 86% from 69% over the first four-months of this year. Conversely, the correlation of the currency with the Australia-US 2-year swap yield differential has fallen to 47% from 57%.
All this means, suggests the team, that it would only take another 1.2% decline in the S&P500 to pull AUD/USD below 0.80.
