Fair or not, the Australian dollar remains overvalued

Australia is one of the cheapest places in the world to buy a new iPad, a survey suggests, raising questions about whether the Australian dollar is overvalued.

Australia is one of the cheapest places in the world to buy a new iPad, a survey suggests, raising questions about whether the Australian dollar is overvalued.

An analysis by Commonwealth Securities, which looked at the prices of a 16-gigabyte iPad across 46 countries, found that Australia was the fourth-cheapest place to buy the device, behind Malaysia, Hong Kong and Japan.

The survey compares the price of the iPad according to purchasing power parity (PPP). PPP looks at the prices of a particular good in different countries according to the local currency.

A similar survey by The Economist magazine, the Big Mac Index, recently concluded that the Australian dollar was near fair value in July when it was around US90¢.

But economists say the dollar has some way to fall to reach fair value. "Australia's very expensive. The level of the dollar which would be fair from a PPP-perspective is about 75 to 80 US cents," ANZ currency strategist Andrew Salter said.

"That's based on relative consumer prices in Australia and the US. That's a pretty stable relationship. In fact, the IMF and the World Bank, the Wharton Business School and HSBC also put PPP fair value within that range."

The idea of fair value for a currency is also one that is hotly debated among analysts. Measures used to judge the strength of currencies include PPP and the real effective exchange rate (REER) - the exchange rate against a range of currencies, adjusted for inflation.

The Australian dollar, when compared with the level of commodity prices - which surged to record levels before weakening in recent months - could also be seen as closer to its fair value than using the PPP models, Mr Salter said.

"If you take into account commodity prices and the interest rate differential - the two things that jointly determine longer-term fair value for the Australian dollar, we put that at about 88 to 90 US cents."

What is clear is that the Australian dollar has soared above its long-term historical average in the US70¢ to US80¢ range following the start of the mining investment boom, RBS senior currency strategist Greg Gibbs said, citing Bank for International Settlements' effective exchange rate indices. The BIS looks at up to 61 currencies since the 1960s and using weights based on trade data from 2008 to 2010.

The Australian dollar is sitting about 30 per cent above its average of the past two decades, Mr Gibbs said. "If you had record interest rates and a currency that was somewhat average, you would anticipate that the economy would be growing much faster than it is. All the evidence would suggest the currency is still restraining the economy."

The Australian dollar was buying US94.18¢ late on Monday.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles