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AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

2011-03-09 15:21:00
Joel Kruger, David Rodriguez, Ilya Spivak,
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Australian Dollar / US Dollar MonthlyTechnical Forecast

Weekly Chart

AUDUSD_Australian_Dollar_US_Dollar_Exchange_Rate_Forecast_body_aud2.png, AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

Prepared by Joel Kruger

Although medium-term setbacks have stalled out for now ahead of 0.9800, we continue to favor risks for additional downside and like the idea of selling into current rallies. Ultimately, we see the market in the process of carving out a major top and any rallies from here should be well capped below 1.0200 on a weekly close basis. Only back above 1.0200 gives reason for concern, while a weekly close below 0.9800 should accelerate to 0.9535 and below. We rarely incorporate wave counts into our analysis but we also can not ignore a very pretty count which suggests that we are in the process of completing the final wave of a major up-trend. We credit on this count to colleague Jamie Saettele.

Australian Dollar / US Dollar Interest Rate Forecast

Currency, Central Bank

Australian Dollar,Reserve Bank of Australia

US Dollar, US Federal Reserve

Net AUDUSD Spread

Signal

1-Year Expectations(Basis Points)

30

35

(5)

Bearish

Yield in 1 Year(Percent)

5.05

0.60

4.45

Bullish

AUDUSD_Australian_Dollar_US_Dollar_Exchange_Rate_Forecast_body_Picture_2.png, AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

The Australian Dollar continues to benefit from the highest short-term interest rate of any G10 currency, and relatively muted forecasts for further interest rate hikes have had seemingly little effect on the high-flying AUDUSD. Indeed, the Reserve Bank of Australia is expected to raise interest rates by a relatively modest 30 basis points through the coming 12 months. Such a sum is actually less than the similarly tepid expectations for the US Federal Reserve. Of course, the AUD would still boast an impressive 445bp short-term yield advantage over its US namesake.

Interest rate expectations remain supportive of the AUDUSD, and it would take a substantial correction in either RBA or Fed rate forecasts to shift momentum in the US Dollar’s favor.

Australian Dollar / US Dollar Valuation Forecast

AUDUSD Valuation Forecast: Bearish

AUDUSD_Australian_Dollar_US_Dollar_Exchange_Rate_Forecast_body_03092011_AUD.png, AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

The Australian Dollar remains the most overvalued currency against its US counterpart, trading at a staggering 31.8 percent premium to its PPP-implied fair value. However, the fuel behind such performance came from an aggressively hawkish RBA, which now has clearly shifted gears into neutral. This seems to finally open the door for a significant reversal, with priced-in monetary policy expectations now pointing to a narrowing of yield differentials in favor of the greenback over the coming year. The makings of a slowdown in China – Australia’s top trading partner – and lingering worries about the Euro Zone debt crisis as well as turmoil in the Middle East add to downward pressure on the still sentiment-sensitive currency. While confirmation of a top remains elusive, a very attractive selling opportunity looks to be just around the corner.

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.

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