Although the AUD has fallen a long way from previous peaks, it may surprise investors to know just how potentially low it could go. To gauge the “fair-value” for the Australian dollar, the first two points of reference are inflation differentials and the terms of trade. With inflation, if Australian costs and prices are rising faster than those of our trade partners, it means we are losing trade competitiveness even if the nominal exchange rate remains unchanged, which is tantamount to a rise in Australia’s “real” rate. Then, fair-value for the AUD would be the level of the nominal exchange rate that restored the “real” exchange rate to some long-run normal or “average” level, after allowance for differing cost and price trends between us and our major trading partners over time. As seen in the chart, Australian consumer prices have risen by around 40% more than those of the US since the late 1980s. As a result, the “real” exchange rate has risen by 40% more than the nominal exchange rate over this period. To read more, visit: (VIEW LINK)