Australian Dollar / US Dollar Monthly Exchange Rate Forecast

Australian Dollar / US Dollar Monthly Technical Forecast

A major double top formation has been triggered that has forced a shift in the broader trend. Deeper setbacks are now projected over the coming weeks well below 0.8000 and towards 0.7500. Any corrective rallies should be very well capped ahead of the 0.8700 area.

Australian Dollar / US Dollar Interest Rate Forecast

Reserve Bank of Australia interest rate hikes have played a fairly significant role in medium-term Australian Dollar strength, but an inevitable pullback in RBA yield forecasts has coincided with substantial AUD corrections. To be clear, the Australian Dollar/US Dollar pair has moved nearly tick-for-tick with the US S&P 500 and other risk barometers through recent trade. Turmoil across financial markets has unsurprisingly led to significant AUD pullbacks and provides the much simpler explanation for recent weakness.

Yet it is likewise important to note that the correction in RBA rate expectations removes an important source of AUD strength, and our interest rate-based bias on the AUDUSD has turned somewhat bearish as a result.

Australian Dollar / US Dollar Valuation Forecast

The Australian Dollar remains the most overvalued currency against the US Dollar, trading 16 percent above its PPP-implied exchange rate. A sizable downward correction seems all but inevitable at this point however after the previously aggressive RBA – the catalyst behind much of the recent run higher – changed gears into neutral, holding rates unchanged at 4.5 percent at its 6/1 meeting and signaling an end of the tightening cycle. A Credit Suisse gauge of priced-in policy expectations shows markets are betting the RBA will maintain borrowing costs at current levels for at least the next 12 months. A return to risk aversion would speed up the move lower. Indeed, with China proactively moving to slow its economy amid fears of asset bubbles and runaway inflation and the EU hamstrung, the US is left as the sole major driver of global economic recovery; if the States are unable to shoulder this burden and the rebound falters, renewed flight toward safe-haven assets promises to send the US Dollar higher, particularly against the risk-sensitive commodity currencies. Alternatively, if the US does manage to keep the recovery afloat, the Aussie no longer seems as attractive of a carry currency considering the absence of a widening rate differential that can be had with its Canadian or New Zealand counterparts, further bolstering the case for weakness. We will monitor prices for attractive selling opportunities in the days and weeks ahead.

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.