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Australian Dollar / US Dollar Monthly Technical Forecast
11/3/2009 Daily Chart
The AUDUSD has gone straight up, literally. Last month marked the 9th consecutive up month and 10th in the last 11 months. Like the EURUSD, AUDUSD rate of change at the recent top weak. A daily close below trendline support would give scope to .8484, .8270 and then .7700.
Australian Dollar / US Dollar Interest Rate Forecast
The Australian Dollar/US Dollar exchange rate is one of the few that remains sensitive to interest rate developments, and currently bullish forecasts for AUD yields points to further rallies for the AUDUSD. The Reserve Bank of Australia became the first G10 central bank to raise rates in the aftermath of the global financial and economic crisis. Such relatively aggressive action has given traders hope that the central bank may continue to boost yields through the foreseeable future. Carry traders nonetheless remain extremely sensitive to global financial market risk sentiment, and any substantive deterioration in key risk barometers could negate the effect of bullish RBA yield forecasts. In fact, the Australian Dollar may be the first to lose if major equity indices turn substantively lower through near-term trade.
Australian Dollar / US Dollar Valuation Forecast
AUDUSD Valuation Forecast: Bearish
The Australian Dollar has reached a pivot juncture with AUDUSD now trading above the 20% upper extreme valuation threshold. The last time this boundary was crossed was in February 2008, with prices beginning a precipitous collapse five months later in July that would take the pair 33.5% lower by early 2009. While it surely premature to say with certainty that a correction lower will happen in November, cues from equities (which is correlated to the tune of 94.2% with AUDUSD) are hinting that a catalyst for a major bearish shift could soon materialize. Indeed, the MSCI World Stock Index dropped the most in since February while the VIX index of US stock options volatility that is often seen as a proxy for investors’ risk aversion rose the most in a year in October.
What is Purchasing Power Parity?
One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.
Written by Ilya Spivak, Currency Analyst; David Rodríguez, Quantitative Strategist; Jamie Saettele, Senior Technical Strategist for DailyFX.com
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