Ben Woodhead Deputy editor - digital

Ben Woodhead is deputy editor - digital at the Financial Review Group. He writes on business, technology, politics and the economy and can be found on BRW, The Australian Financial Review and Smart Investor.

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Why hedge fund Hayman Capital thinks the $A is massively overvalued

Published 17 September 2012 09:17, Updated 18 September 2012 09:25

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Why hedge fund Hayman Capital thinks the $A is massively overvalued

Hayman Capital global strategist Richard Howard thinks the Australian dollar could fall as low as US85¢ in the next 12 to 18 months if there’s a big slow-down overseas and if Australia’s terms of trade fall substantially. Photo: Louie Douvis

The Australian dollar is trading well over parity at around $US1.0551. But if hedge fund Hayman Capital is to be believed, that’s anywhere from 15 per cent to 20 per cent above where it should be.

Speaking to The Australian Financial Review on Monday, Hayman global strategist Richard Howard joins a number of prominent voices in cautioning that the Aussie dollar is being pushed higher by foreign central bank appetite for the local unit. The Norwegian krone is in the same basket, being from a triple-A rated country, like Australia.

He says the relatively small size of the Australian dollar market compared to the US dollar and euro markets amplifies the effects of this central bank buying, allowing the Aussie to trade well above where it should be.

“But if the Reserve Bank [of Australia] starts cutting rates aggressively, and removes much of the interest rate differential between Australian and US rates, there’s simply no sense in the Australian dollar trading above parity with the US dollar.

“If you get a big slow-down overseas, and Australia’s terms of trade falls substantially, you could see the Australian dollar fall to around US85¢. I don’t expect that it will happen immediately, but it could happen in the next 12 to 18 months.”

Howard also takes a pretty big punt on where Australia’s official cash rate could end up, saying that it could “come down to European/US levels of close to zero in the next two years”.

On September 4, the RBA opted to leave interest rates steady at 3.5 per cent, giving the benchmark quite a long way to fall if Howard is correct.

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