[B]AUDUSD Monthly Technical Forecast[/B]
The market has been in the process of a multi-month consolidation following the violent drop off of the multi-year highs by 0.9850 reached in July 2008. Ultimately however, the bear trend remains firmly intact and a fresh lower top is now being sought out by 0.7270 (2009 high/January) to be confirmed on a break back below 0.6000 (2008 low/October). Below 0.6000 opens a direct test of the 78.6% fib retracement off of the 0.4775-0.9850 move, with a break below highly increasing the probabilities for a 100% retracement back to challenge the all-time lows from 2001 at 0.4775. Back above 0.7270 would ultimately be required to negate.
[B]
AUDUSD Fundamental Outlook/Interest Rate Forecast[/B]
The Reserve Bank of Australia chose to pause its aggressive easing policy when it kept rates on hold at 3.50% during its last policy meeting. The rapid declining interest rate differential between the RBA Cash Rate and the US Fed Funds Rate has sunk the Australian dollar/ US dollar and the recent refrain from easing could lend support for the pair.
Despite the bold move to keep rates on hold, Credit Suisse overnight index swaps are still pricing in another 71 bps in future cuts. Therefore, with the spread between the RBA cash rate and the Fed Funds rate at -112 it could provide further weakness for the pair. However, we see that recent price action has lost its correlation with the interest rate outlook as risk sentiment has driven dollar flows. Nevertheless, the negative expectations should limit any upside potential for the pair.
[B]
Australian Dollar – US Dollar Valuation Forecast[/B]
The Australian Dollar was the best performing currency against the U.S. Dollar during the month, and the AUDUSD may continue to push higher over the following month as the Reserve Bank of Australia adopts a neutral policy stance going forward. However, even after posting a 1.17% gain in February, the value gap remains little change from the previous month, which suggests that investors remain bearish against the pair as they continue to curb their appetite for risky assets. Nevertheless, as the RBA concludes its easing cycle for the time being, the Australian dollar is likely to push higher over the near-term and minimize the imbalance in the fair value but nevertheless, as trade conditions deteriorate at a record pace, increased turmoil in the global economy could drag on the exchange rate as the outlook for future growth deteriorates.
[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 the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies overvalued against the Dollar are denoted in [B][U]RED[/U][/B], while those that are undervalued are denoted in [B][U]GREEN[/U][/B].