Australian Dollar US Dollar Exchange Rate Forecast

I’ve been expecting a top to form in a small 2nd wave near 9140 in recent days, but one has yet to form so an alternate count must be considered. Additional strength could exceed 9411 in order to complete the entire rally from the 2008 low. Estimated resistance is 9675, which is the 161.8% extension of the 8070-8865 advance.

Australian Dollar / US Dollar Interest Rate Forecast

The Reserve Bank of Australia has left rates unchanged over the past two months as it appears that they have come to the end of their tightening cycle. The central bank began hiking rates at the end of 2009 and continued their aggressive tightening throughout the beginning of 2010. Lingering concerns over global growth will most likely leave the central bank on hold for the remainder of the year which has led to a negative spread versus the dollar which could become a weighing factor for the AUD/USD, especially if risk appetite fades. Indeed, the pair is currently holding a 86% correlation with risk trends and a decline in global growth would favor the safe haven greenback.

Australian Dollar / US Dollar Valuation Forecast

AUDUSD Valuation Forecast: Bearish

The Australian Dollar is the most overvalued against its US counterpart and well above positioning extremes, trading at 24.2 percent premium to PPP-implied fair value. With RBA rate hikes now apparently off the table and the rally in risky assets inherently vulnerable as cost-cutting becomes increasingly insufficient to produce earnings growth amid lackluster revenues, the time looks ripe for a correction lower, opening the door for sellers to capitalize on a lucrative valuation gap of over two thousand pips.

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.