Australian Dollar / US Dollar Monthly Technical Forecast
No sign of a let up just yet, with the market still very much trading within a bullish trend. We have already seen 8 consecutive positive monthly closes, and with the market just shy of critical psychological barriers at 0.9000, we could be on the verge of a ninth consecutive positive monthly close. However, while we do expect to see a test of 0.9000 at this point, the psychological barrier also coincides with the major 78.6% fib retracement off of the 2008 extreme high-lows, and as such, makes for an attractive counter-trend short opportunity. We think that the bull run is very near its end.
Australian Dollar / US Dollar Interest Rate Forecast
The Australian Dollar/US Dollar exchange rate has been in lock step with interest rate expectations which has propelled the pair to its highest level in over a year. The RBA was the first of the G-20 raise rates following the credit crisis and signaled that further tightening was imminent. Markets are currently pricing in another 192 bps of rate hikes over the next twelve months which leave the pair as the undisputed high yielder. The unexpected move is a clear sign that they expect the global economy and in particular the Asian region is on track for continues growth. As long as markets share their optimistic outlook then the Australian dollar should continue to remain supported. However, rising unemployment levels in the U.S. and Europe may spur risk aversion and weigh on the pair as the unwinding carry trade favors the greenback.
Australian Dollar / US Dollar Valuation Forecast
All signs seem to point to the fact that the Australian Dollar’s
steady push into overvalued territory against its US counterpart is
going to continue as the interest rate outlook sees traders clearly
betting on the RBA over the Federal Reserve, especially after the RBA’s
surprise rate hike, while eight consecutive months of gains give the
currency plenty of momentum. A drop risk appetite prove to be an
overriding factor to other considerations, however, with AUDUSD still
showing a formidable 88.7% correlation to the MSCI World Stock Index.
While we see a move lower in risky assets as quite reasonable
considering the dour economic backdrop behind the buoyant asset prices
of recent months, picking a top on the Aussie has been a dangerous
proposition since February and doing so now as rates are set to reverse
course higher would be less prudent still. The outlook is bearish on a
strict valuation basis, but staying on the sidelines seems optimal for
the time being.
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.
Written by Joel Kruger, Technical Currency Strategist; John Rivera, Currency Analyst; Ilya Spivak, Currency Analyst for DailyFX.com