aud-usd

Australian Dollar / US Dollar Monthly Technical Forecast

Australian Dollar / US Dollar Monthly Technical Forecast
12/9/2009                    Monthly Chart

Prepared by Joel Kruger

The market is finally starting to show some good downside follow through from previous bearish weekly closes to suggest that a major top is now in place by 0.9410. A lower top is now sought out by 0.9325 ahead of the next drop through critical support by 0.8905. The 0.8905 level represents the neckline of a major head & shoulders topping formation, which if broken, would force a shift in the structure and trigger a deeper round of setbacks all the way back into the 0.8400's. Ultimately, only a close back above 0.9325 would negate bearish outlook and give reason for pause. 


Australian Dollar / US Dollar Interest Rate Forecast

The Australian Dollar/US Dollar exchange rate spread has significantly decreased as the RBA has raised rates for three consecutive months for the first in its history. The 75 bps in total tightening has lowered the outlook for future rate hikes to 102 from 185 bps over the next twelve months which has lowered the spread to +34 from +105. Therefore, we could see the pair’s exchange rate follow yield expectations lower. The Australian dollar and the greenback find themselves at the opposite ends of the carry trade and a pull back in risk appetite could lead to the unwinding of flows out of the high yielder and back into the reserve currency. Conversely, improving fundamentals may spur demand for risky assets continuing the pair’s upward trend.


Australian Dollar / US Dollar Valuation Forecast

AUDUSD Valuation Forecast: Bearish

The Australian Dollar has started to weaken a bit having hit a new 20-year overbought extreme against the US Dollar at more than 25% above its PPP-implied exchange rate. Risk appetite remains the dominant factor to consider, AUDUSD still showing a formidable 93.4% correlation to the MSCI World Stock Index. Equities look increasingly shaky trading at the highest levels relative to earnings in seven years as the impacts of fiscal measures begins to wane and the spread in 1-year yield expectations has significantly narrowed despite three consecutive rate hikes from the RBA, hinting that a meaningful correction lower may be close at hand.


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.


 

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