Fair Value For Aussie Dollar Around US90c

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By Chris Shaw

Westpac Bank is the latest to argue there is further upside in the Australian dollar, suggesting while its model has shown the currency to be undervalued relative to the US dollar since late 2005 the recent rally has not addressed that situation.

Given interest rates spreads remain in favour of the Aussie dollar and commodity prices continue to stay at elevated levels, the bank estimates fair value for the currency is somewhere in the range of US87-92c, suggesting significant further upside.

Whether the upside lasts is another matter, as the bank expects the current over-reaction on the downside in terms of rates in the US will correct itself in coming months, while its outlook also calls for softer commodity prices.

As a result, its estimate of fair value falls to US83-89c by the end of this year and to US75-81c by the end of 2008, which is roughly in line with where the dollar has traded of late.

In spot terms the bank’s forecast is for a level of about US79c by the end of June, falling to US78c by the end of this year.

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