The Australian dollar is more likely to be undervalued than overvalued, according to CommSec.
Mind you, the prediction, which flies in the face of economic consensus right now, isn’t being unreservedly embraced by the CommSec team.
It’s just what they get when they input the results of their annual iPad index, which tracks the prices of 16GB iPads with Retina displays across 46 different countries. It then converts these prices to American dollars, and compares how far from the mean countries end up.
This can be used to take a guess at the ‘true’ value of a currency (given the relative strength of its economy) because of an economic theory called purchasing power parity (PPR).
PPP holds that in a perfect market, goods should cost the same all across the world assuming transport costs are negligible.
Australia is the fourth cheapest place in the world to buy an iPad, as the price hasn’t changed from $AU539 even as the Australian dollar slid to buying just US94 cents.
This would suggest, on the surface, that the Australian dollar should be ranked close to parity with the American dollar, as that would bring the cost of the iPad closer to the global norm.
CommSec’s index freely borrows from The Economist’s famous Big Mac index, which does the same thing, only with McDonald’s Big Macs.
That index, last conducted in July when the dollar was buying US92 cents, figured the Australian dollar was about where it should be.
CommSec economist Savanth Sebastian told SmartCompany that it’s a surprising result. But one he thinks is worth considering.
“There’s a lot of potential for further strengthening of the currency right now, given the improvement in economic conditions out of China and the fact that the US Federal Reserve is taking longer to taper their stimulus,” he says.
“When you add that all into the mix, perhaps it shouldn’t be surprising. We still have a fundamentally sound economy, and it was confidence that was holding us back. With the election, that confidence is turning.”
Australians rarely find themselves paying cheaply for technology. The issue even went to a parliamentary inquiry into price gouging recently.
Sebastian says that maybe, given the result of the index, iPads would be one item Australians choose to purchase from local retailers over their overseas competitors.
But he doesn’t expect to see this replicated across other goods.
“Online retail is an area that’s just going to continue to strengthen. Realistically, the currency has to fall back to buying less than US85 cents before you get a reversal of that.”
And that, Sebastian says, will be a long time coming.