Australian Dollar US Dollar Exchange Rate Forecast

Australian Dollar / US Dollar MonthlyTechnical Forecast

Monthly Chart

Prepared by Joel Kruger

Although the market has been very well bid over the past several months, with the latest rally opening yet another move beyond critical psychological barriers by 0.9000, longer-term studies show the price trading near its cyclical highs, with any rallies in previous years up into current levels very well capped ahead of some major declines. A closer look at the major moving averages on the daily chart shows all of these moving averages coiling together to warn of a major move ahead, which we contend will be to the downside.

Australian Dollar / US Dollar Interest Rate Forecast

The Australian Dollar’s substantial interest rate advantage against its US namesake has helped push the AUDUSD to noteworthy heights, and relatively stable outlook supports the case for AUD strength. Interest rate traders initially predicted that the Reserve Bank of Australia would continue raising rates through 2010. Yet those same interest rate derivatives now show that the RBA’s cash target will remain unchanged in the coming 12 months. Normally this would be enough to hurt such a yield-sensitive currency, but similar downgrades on US Dollar yield expectations have essentially offset said moves.

All else remaining equal, we expect interest rates will continue to support AUDUSD strength.

Australian Dollar / US Dollar Valuation Forecast

AUDUSD Valuation Forecast: Bearish

The Australian Dollar remains the most overvalued against its US counterpart and well above positioning extremes, trading at 24.4 percent premium to PPP-implied fair value. With RBA rate hikes apparently off the table for the time being, risk sentiment lines up as the dominant driver of price action. Indeed, AUDUSD continues to show a strong correlation with the MSCI World Stock index. On balance, this points toward weakness ahead in the medium term amid increasing signs of a global economic slowdown on tap for the second half of the year, an outcome that is likely to sink shares and the Aussie alike. Indeed, the JPMorgan Global PMI gauge of economic activity dropped to the lowest in six months in August.

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.