The floating exchange rate has been doing what it’s supposed to this last few weeks – dropping like a stone to absorb some of tempest coming from offshore. But the surprise is that it isn’t falling faster.
To get a measure of this, I threw together a rough model to ‘forecast’ the AUD.
AUD = f(VIX, WoW AUD Equity Returns, 5yr yield gap to the US, RBA Commodity export prices)
The objective isn’t really to forecast, it’s to ask what ‘should’ the AUD be given what’s going on with these other indicators.
I judge that things changed in 2009 (that’s when the offshore bond buying started) so i split the sample into two parts: 1996 to 2008 and 2009 to present.
The AUD has been over-valued relative to both models for some time – suggesting that there is indeed something more going on. What I find most interesting is that the degree of over-valuation has increased over the past two months.
In late March, the AUD was ~1.5 cents expensive relative to the 09+ model, and ~10c expensive relative to the 96-08 model. Over the last few weeks, the VIX has spiked, equity returns have fallen, the yield gap to the US has compressed, and the AUD has fallen – but not by as much as it has done in the past.
Reflecting this, the AUD is now ~8.5c expensive relative to the 09+ model, and ~13c expensive relative to the 96-08 model.