NAB On AUD/USD Short-Term Fair Value

NAB note that "we started Sep with AUD almost 0.02 'expensive' relative to the model valuation. This overvaluation persisted for the first 3 weeks or so of Sep, only reverting to firstly fairly valued then slightly 'cheap' when the US equity sell-off broadened out beyond the technology sector and the AUD's -ve correlation with risk aversion strongly reasserted - the AUD sell-off then going slightly beyond what the model justified. At the tail-end of the month, AUD undervaluation relative to the model became much more pronounced, fair value at month-end is close to 0.74. This is because in the model, some of the elements included in the interest rate term factor only come into play with a significant lag (6+ months). Thus, only now is the model fully capturing the impact of the sharp falls in US interest rates in late Feb & March in anticipation and then the reality of aggressive Fed easing measures in response to the pandemic, which of course went well beyond what occurred in Australia. The suggestion therefore is that we do not need to see further falls in US rates relative to Australian to justify higher AUD spot levels in coming months. Note too that if the RBA does act to further reduce policy target rates in coming months, but by no more than say 15bps, it will not make a big impact in terms of AUD model valuation (meaning less than a cent)."