Unlike New Zealand, the carry trade is small relative to aggregate capital flows in the Australian market. So the risk from an unwinding of carry trade is negligible.
For a description of an RBA exchange rate model see Stone, et al (2005), “A Small Model of the Australian Macroeconomy: An Update,” RBA RDP 2005-11. The CGER estimates of overvaluation are 9 percent (equilibrium real exchange rate), 9 percent (macroeconomic balance approach), and 18 percent (external sustainability approach).
Potential vulnerabilities stemming from Australia’s current account deficit were extensively discussed in IMF Country Report 06/373, which concluded that the deficit appears to be sustainable although risks from the resulting debt require careful monitoring and management.
In aggregate, the States eliminated net debt in 2001/02 and up to 2005/06 had run fiscal surpluses in five of the previous seven years. The strong fiscal performance at the state level was partly due to the widespread adoption of medium-term fiscal policy frameworks.
Stress tests performed during the FSAP indicated that banks are highly resilient to changes in interest rates.