[B]AUDUSD Monthly Technical Forecast[/B]
Price action in the antipodean is looking extremely constructive longer-term, with the market breaking back above the previous 2009 highs from January at 0.7270 to trigger a major double bottom formation. The formation ultimately projects fresh upside over the coming weeks/months back towards the 0.8500 area. However, we would not recommend playing the double bottom, with the market just as easily seen rolling back over in favor of some more bearish consolidation. Our preferred strategy therefore is to sell into extreme rallies and buy into overextended dips.
[B]
AUDUSD Fundamental Outlook/Interest Rate Forecast[/B]
The Australian dollar is one of the few major world currencies that remain sensitive to interest rate developments, and Reserve Bank of Australia monetary policy outlook should have a noteworthy effect on AUD/USD price action. As the highest-yielding G10 currency, the Aussie dollar has been a major beneficiary of risk capital. Recent S&P 500 and broader risk sentiment recoveries mean that many traders are once again willing to chase yields. As long as markets remain buoyant, we expect further Australian dollar strength.
Overnight Index Swaps show expectations of fairly stable AUD yields through the coming 12 months—a positive development for the yield-sensitive currency. Our interest rate-based forecasts are subsequently bullish, but it likewise remains especially important to watch for shifts in global risk sentiment. If financial markets turn lower, the Australian Dollar could suffer against the safe-haven US dollar and Japanese Yen.
[B]
Australian Dollar – US Dollar Valuation Forecast[/B]
The Australian Dollar remains close to its PPP-implied exchange rate for the second consecutive month, though swelling risk appetite suggests that the currency could begin to see a substantial move into overvalued territory in the weeks ahead. AUDUSD is now 89.9% correlated with the MSCI World Stock Index, a formidable relationship to be sure. The RBA has also kept interest rates above those of the Fed and has eschewed quantitative easing, making the Aussie attractive as both a source of yield and a store of value as inflation begins to tick higher when the global economic rebound picks up steam. While the pair’s current proximity to its “fair” value makes our current posture neutral, we see a clear possibility that a push higher could begin to create a sizable disparity to be exploited later.
[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 pairs that are undervalued against their PPP exchange rate have the size of the value gap denoted in [U][B]RED[/B][/U], while those that are overvalued are denoted in [U][B]GREEN[/B][/U].