CBA Look For Some Convergence To Fair Value

CBA note that “the RBA’s commodity price index for May has been released and indicated a modest fall in Australia’s key commodity prices. Meanwhile, the Australia‑U.S. two-year swap rate differential turned positive for the first time in fourth months as the RBA started its tightening cycle. Overall, we estimate the mid‑point of AUD/USD fair value range remains unchanged at $0.89. But with a weaker spot level, AUD/USD is currently the most undervalued since February 2009. AUD/USD has been trading below its fair value for 40 months, the longest in our estimation period. We consider a better Chinese economic outlook will be the main catalyst for AUD/USD to converge with its fair value. The Chinese government’s increasing focus on supporting the economic recovery is a very positive sign for further increases in AUD/USD spot in our view.”