Since September, the Australian dollar has remained broadly steady at a little above 70 US cents. Evidente's currency model shows that at current levels, the A$ is trading broadly in line with fair value. Despite renewed A$ depreciation in the past year, ASX listed US dollar earners have under-performed due to the fact that the overweight bet 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. 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. (VIEW LINK)
Founder of Evidente, Salvatore Ferraro, is a top rated quantitative analyst and has over 17 years of experience in financial markets, with investment banks, Goldman Sachs and Merrill Lynch, providing advice on best practice to portfolio managers...
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