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AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

2011-12-07 06:13:00
Jamie Saettele, CMT, David Rodriguez, Ilya Spivak,
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Australian Dollar / US Dollar Technical Forecast

Monthly Chart

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

Prepared by Jamie Saettele, CMT

The trend line that extends off of the 2009 and 2010 lows has given way twice since September but thus far the breaks have proved false. The uptrend since 2009 is certainly damaged but the ability of the September lows to hold suggests sideways action will last through at least December. Resistance this month is 10450 and 10700/50. Support is 10100 and 9980.

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)

(134)

15

(149)

Bearish

Yield in 1 Year(Percent)

3.41

0.40

3.01

Bullish

AUDUSD_Australian_Dollar_US_Dollar_Exchange_Rate_Forecast_body_Picture_6.png, AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

Australian Dollar / US Dollar Interest Rate Trading Bias: Bullish

An important downgrade in Australian yield expectations has coincided with a similarly dramatic AUDUSD reversal. Yet the Aussie currency’s absolute interest rate advantage will likely remain substantial through the foreseeable future, and yields may continue to support the AUD through the medium term. Traders should instead watch moves in the Dow Jones Industrial Average and other key ‘risk’ barometers. Our correlation studies show that the short-term link between the AUDUSD and Dow trade near record strength.

Investors will often pour into highly speculative bets on high-yielding currencies when the risk of substantial exchange rate moves seems remote. That is to say: when the sun is shining and all is well with the Dow Jones Industrial Average and other key ‘risk’ barometers, the high-yielding AUD is an attractive bet against the low-yielding US Dollar. It will be critical to watch whether the Dow Jones Industrial Average can continue its recovery from recent lows.

Australian Dollar / US Dollar Valuation Forecast

AUDUSD Valuation Bias: Bearish

AUDUSD_Australian_Dollar_US_Dollar_Exchange_Rate_Forecast_body_Picture_7.png, AUDUSD: Australian Dollar US Dollar Exchange Rate Forecast

While the Australian Dollar has given up its place as the most overvalued currency against its US namesake, but spot prices remain grossly overdone at 34.5 percent above its PPP-implied exchange rate. The supportive powers of a robust RBA rate hike outlook have faded, with the central bank now priced in to issue over 125bps in rate cuts over the coming year. Risk appetite trends have also turned against the Aussie as a rapidly deteriorating outlook for the global economic recovery weighs on the sentiment-sensitive currency along with the spectrum of growth-geared assets. At long last, the time for a correction seems to be at hand.

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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