VIEW: Bank of America Research note that.....>

AUSSIE: VIEW: Bank of America Research note that they have prev. used their

"version of the RBA's preferred error correction model for AUD equilibrium using

the co-integrating relationship of the real trade wtd FX rate with the goods

terms of trade & the real interest rate diff (Australia vs. G3). Updating this

model up to Q220 (using quarterly avgs) shows the AUD TWI is ~5% undervalued vs.

its long-term equilibrium. This is hardly extreme from a historical perspective

(well within one standard dev.) but is consistent with limited objection from

the RBA on the exchange rate so far." When looking at the "AUD TWI level based

on the estimated changes from the error correction model using shorter-term

drivers - S&P 500, VIX & CRB - they have been especially relevant for the

exchange rate in recent months. While this is primarily explains short-term

dynamics (as opposed to fundamental equilibrium), it is worth highlighting that

despite the rally in risk assets (equities & commods), the fact these are mostly

still "weaker" in quarterly average terms (Q2 vs. Q1) means the AUD TWI rise in

Q2 was incongruent with the estimated drop. In simpler terms, the AUD TWI is

back to pre-pandemic levels even though underlying risk metrics are mostly not."