http://www.smh.com.au/business/mark...llars-to-sharply-devalue-20150223-13lyrz.html Commodity currencies including the Australian dollar still remain overvalued in spite of the rout in prices for ore, metals and energy, and are failing to provide optimal support for other sectors in those economies, putting pressure on policymakers. This could set up a scenario where commodity currencies "overshoot" on the downside before settling at what strategists believe to be fair value. Todd Elmer, foreign exchange strategist for Citigroup, said "I think that we are probably still overvalued when you look at the commodity currencies" because they are providing insufficient "cushion" to non-mining industries. Central banks in Canada and Australia have cut interest rates in response to the downturn in the commodity cycle and disinflationary forces; in New Zealand rate hikes have been paused and economists cannot rule out rate cuts. Meanwhile, on Monday, Citigroup forecast the Australian dollar at US70 by December 2015 and US75 by March against a rallying US dollar. It is fetching US78.31 in late Monday trading. The Australian dollar is one of the Group of 10 currencies more vulnerable to US dollar appreciation as the greenback advances for different reasons this time around. The last US dollar march upward was predicated on safe haven-seeking by investors in the financial crisis; now it is the greenback responding to the improvement of the world's biggest economy. "There are lots of different ways to look at currency valuation and by any of those measures, given the fact that Aussie, Kiwi and Canada [dollars] have declined against the US dollar it's fair to say that they are less overvalued but the likelihood is we continue to see pressure," Mr Elmer said. In an environment where the US and China were the dominant influences on those currencies it was also possible they "overshoot", which for the Australian dollar could devalue for a brief period under US70. "Obviously the US dollar has appreciated quite a bit over time; you wouldn't make the argument that currencies such as Aussie, Kiwi or Canada [dollars] are as overvalued as they were previously," he said. "I think it's certainly true of most of the commodity currencies and really the question is the degree of policy flexibility policymakers have to bring about a lower currency." Room to cut rates further The Reserve Bank of New Zealand, for example, was hampered by the potential for lower interest rates to inflate a housing bubble, he added. And the reality was that central banks did not have a lot to lose in current conditions if they can assert control over their foreign exchange rate. "A lot of policymakers would prefer to see their currencies lower because the risks associated with pursuing that strategy are very low at this point," Mr Elmer said. "There really is very little downside to central banks across the world continuing to talk down their currency." There was room for the Reserve Bank of Australia to cut rates further, the Singapore-based Citigroup strategist said, consistent with financial markets' pricing, which indicates at least another cut from the RBA, potentially as soon as March. "The Bank of Canada struck first, but I think, looking at the level of interest rates in Australia, that there's room for the market to price in potential additional cuts and if we see sentiment continue to sour on the basis of weaker activity across Asia, then I think there remains scope for investors to better price in the slower trajectory of growth in China and better price in the fact that authorities seem more willing to tolerate slower growth. "China is viewed as the key marginal buyer of commodities and it is obviously important for regional sentiment." Mr Elmer called the 2015 US dollar story a more "pro-cyclical" one. "When we've seen previous periods of US dollar appreciation it's been on flight to safety, risk aversion. The likelihood is the dollar appreciates on a pro-cyclical basis. The economy's picking up in the US, the likelihood is that continues, partly because we're going to see a tailwind from lower energy prices." While the destructive impact of lower energy prices on energy exporting economies was well understood, the positive effects on energy importers were not, Mr Elmer argued. "Investors may be underestimating the degree to which this is a supportive factor this is a direct boost to consumption."