[B]Australian Dollar / US Dollar Monthly Technical Forecast[/B]
The market continues to trend higher with the outlook at present looking quite constructive. However, despite the latest break above the 61.8% fib retracement off of the major 2008 high-lows, we question whether this recovery can be sustained with medium-term studies now approaching overbought levels. Any additional rallies are now seen limited to the 0.8500 area from where a lower top is sought out ahead of a more significant drop back into the 0.7000’s. Only a weekly close above 0.8500 would negate outlook and expose a push towards 0.9000 and potential retest of the multi-year highs at 0.9850. Look for a break below 0.8125 to confirm bias and accelerate declines.
[B]Australian Dollar / US Dollar Interest Rate Forecast[/B]
The Australian Dollar/US Dollar exchange rate is one of the few that remains sensitive to interest rate developments, and currently bullish forecasts for AUD yields points to further rallies for the AUDUSD. It is undeniable that high Reserve Bank of Australia interest rates bolstered demand for the domestic currency through recent years. Through the recent financial crisis, traders aggressively shed exposure to the Aussie as the forex carry trade collapsed. The more recent rally in global equity indices has clearly reversed said trend, and the Australian Dollar now trades at its highest levels since the Lehman Brothers bankruptcy. Absent a noteworthy correction in global risk sentiment, we expect the AUDUSD to continue trading off of bullish interest rate forecasts.
[B]Australian Dollar / US Dollar Valuation Forecast[/B]
The Australian Dollar continued to advance last month as risk-seeking investors flocked to the high-yielding currency. As has been the case since March, the single indicator to be followed here remains the pace of the global stock rally. Indeed, AUDUSD is now shows a staggering 97.7% correlation with the MSCI World Stock Index. On balance, equity valuations look increasingly overdone having finished July at the highest level relative to earnings since October 2003 in a year when the global economy is expected to shrink for the first time in the Postwar era, suggesting an eventual correction lower will bring the Australian Dollar closer to its PPP-implied exchange rate. In fact, the higher the current push extends, the sharper the eventual downturn is likely to be. In the meantime, further gains may be seen as creating an increasingly attractive selling opportunity down the road.
[B]
What is Purchasing Power Parity?[/B]
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.