CBA On The Drivers Of AUD Fair Value

CBA note that their “fair value equation for AUD/USD includes the Reserve Bank of Australia’s commodity price index and the Australia/U.S. 2-Year interest rate differential. Our fair value equations may not pick up all the important influences on AUD and NZD. We modified our fair value equation to include a popular measure of risk, the VIX. AUD and NZD typically fall while USD and JPY typically lift when perceptions of risk are high. The VIX has lifted sharply from around 20 in early April to around 33 currently. Including the VIX in our fair value equation improves its statistical ‘fit’. However, the estimate of fair value for AUD/USD is only 2 US cents lower at $0.87. We conclude the increase in risk perception is only a minor reason for the fall in AUD recently. Instead, we think the main reason for the large fall in AUD is China’s unexpected and stringent lockdowns to control the spread of omicron.”