Aussie dollar nears its cyclical peak

The Aussie has been the second-best performing currency this year (after South African rand). It is up 31% year to date and up 55% from its 2001 lows. Using standard valuation tools, the Aussie is now above its long-run average (US$0.71) and our estimate of purchasing power parity (US$0.69). Market positioning is also extreme. Hence the risk/reward in buying Aussie at these levels is not as compelling as it was.

But traditional valuation tools are of limited value in the current environment

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