aud fundamentals

Australian Dollar US Dollar Exchange Rate Forecast

Wednesday, 03 June 2009 10:08:49 GMT  |  Jamie Saettele, Senior Currency Strategist; John Rivera, Currency Analyst; Ilya Spivak, Currency Analyst

Australian Dollar / US Dollar Monthly Technical Forecast



The AUDUSD drop from .9856 was in 5 waves and composes either wave 1 of a larger degree bearish impulse or wave A of a 3 wave decline. In both cases, the bearish target is below .60. A flat is unfolding as either wave 2 or B. Near term weakness in wave iv of C should be followed by a thrust to a new high in wave v of C. The 61.8% of the decline from .9856 is potential resistance at .8385.


Australian Dollar / US Dollar Interest Rate Forecast



The RBA left rates unchanged at their last policy meeting but cautioned that if deflation risks grow, there exists the scope for further easing. However, Governor Stevens did tout signs of a global economic recovery with the most significant emerging from China which would be directly beneficial to the Australian economy. Markets were positive on the comment which is evidenced by overnight swaps pricing in 4bps of a rate increase versus a reduction of 28 bps last month.

Rising commodity prices have been a significant driver of Australian dollar strength and if the Chinese economy comes back online then we should expect values to continue to rise. At 3.00% the RBA target rate remains one of the higher yielding if the developed nations and increasing risk appetite should continue to generate support for the pair.


Australian Dollar / US Dollar Valuation Forecast

AUDUSD Valuation Forecast: Bearish



Last month we noted that swelling risk appetite suggested the Australian Dollar could see a substantial move into overvalued territory considering the currency’s high correlation with the MSCI World Stock Index. Indeed, AUDUSD now stands over a thousand pips above its PPP-implied exchange rate. Although economic growth surprised sharply to the upside in the first quarter, the sustainability of such performance after the government’s ample stimulus boost is exhausted seems highly suspect. Indeed, demand for commodities is likely to remain largely subdued given the prevailing outlook for global growth in 2009 and 2010 and the interest rate outlook favors a sizable yield shift in favor of the greenback. Although the current surge in risky assets still needs to confirm a top before a reversal in AUDUSD can begin, medium- to long-term bears are sure to find current positioning attractive.

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 the Organization for Economic Cooperation and Development (OECD). 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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