Australian Dollar US Dollar Exchange Rate Forecast

Australian Dollar / US Dollar Monthly Technical Forecast



Although it has not been a full-proof indicator, the 100-Week SMA has managed to offer itself as a formidable trend indicator over the past several years. The latest sharp recovery out from the late 2008 multi-year lows has finally showed signs of stalling out above 0.8000, which also coincides with a failure to overcome the 100-Week-SMA. While the market holds below the SMA, we favor the idea of looking to sell at current levels by 0.8000, in anticipation of a resumption of declines. The key level to watch below comes in by 0.7790, with a break to confirm our bias and open a deeper round of declines potentially back towards the 0.7000-0.7300 area. Weekly stochastics reaffirm bearish outlook, with the study showing overbought. Only a weekly close above the 100-Week will negate and shift our outlook.


Australian Dollar / US Dollar Interest Rate Forecast



The Australian Dollar/US Dollar currency pair is one of the few that remains sensitive to interest rate forecasts, and currently bearish outlook underlines a key risk to the high-flying AUDUSD. Overnight Index Swaps predict that the Australian Dollar’s yield advantage over the US Dollar will shrink by another 50+ basis points in the coming 12 months. Given that strong yields remain one of the biggest sources of AUD demand, we could expect bearish forecasts to have a negative effect on the AUDUSD.
It remains important to monitor any and all policy shifts by the US Federal Reserve and the Reserve Bank of Australia.


Australian Dollar / US Dollar Valuation Forecast



The Australian Dollar looks likely to begin correcting a formidable 961-pip overvaluation as risky assets look increasingly likely to reverse lower: relative to earnings, the MSCI World Stock Index ended June trading at the highest level since August 2004. In real terms, the world economy grew at an average pace of 4.1% that year, whereas virtually every credible forecasting outlet including the IMF, OECD, World Bank, and assorted central banks all call for global GDP to shrink this year. This suggests stock markets are highly overvalued, pointing to a forthcoming correction downward as the euphoria that began in March subsides. Technical positioning is supportive of near-term turn lower, showing the makings of a head-and-shoulders top on the Dow Jones Industrial Average. AUDUSD is now 92.9% correlated with the Dow (using a 90-day rolling correlation), hinting that any major selloff in risky assets will put tremendous downward pressure on the Aussie.

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.