With the Australian dollar in free-fall recently, possibly the toughest decision an AUD bear has been faced with is which currency pair to short first?
The data below has been taken using Citi Group's WERM (World Exchange Rate Model) and measures long-term fair value in currencies.
Using data derived from CPI-based Real Effective Exchange Rates, commodity terms of trade and net foreign assets over exports, I am yet to see if it is any more accurate than a 200-period moving average (as they look pretty similar when placed upon a chart). However it does provide some sort of benchmark for relative strength and hopefully provide clues for which pair could provide more tradable pips should the AUD continue to fall in value.
JPY, NOK and SEK dominate the 'overvalued' end of the chart, meaning the AUD still has quite some way to fall against these currencies.
However it is interesting to note that AUD/NZD is considered to be around -21.5% below fair value - especially when you consider we are approaching a long term support zone and potential cycle low.
And finally, EUR and USD are considered to be around their 'fair value' against the struggling AUD. This doesn't quite bode so well for my AUD/USD analysis which targets 0.8000 over the coming weeks. But then as the prices change, so will the fair values so I will stick to my technical guns as per usual.
So whilst we can see a very quick comparison for relative strength (or lack of...) let price be your guide.
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