[B]Australian Dollar / US Dollar Monthly Technical Forecast[/B]
The AUDUSD drop from .9856 was in 5 waves and composes either wave 1 of a larger degree bearish impulse or wave A of a 3 wave decline. In both cases, the bearish target is below .60. A flat is unfolding as either wave 2 or B. Near term weakness in wave iv of C should be followed by a thrust to a new high in wave v of C. The 61.8% of the decline from .9856 is potential resistance at .8385.
[B]Australian Dollar / US Dollar 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]
[B]AUDUSD Valuation Forecast: [/B][B]Bearish[/B]
Last month we noted that swelling risk appetite suggested the Australian Dollar could see a substantial move into overvalued territory considering the currency’s high correlation with the MSCI World Stock Index. Indeed, AUDUSD now stands over a thousand pips above its PPP-implied exchange rate. Although economic growth surprised sharply to the upside in the first quarter, the sustainability of such performance after the government’s ample stimulus boost is exhausted seems highly suspect. Indeed, demand for commodities is likely to remain largely subdued given the prevailing outlook for global growth in 2009 and 2010 and the interest rate outlook favors a sizable yield shift in favor of the greenback. Although the current surge in risky assets still needs to confirm a top before a reversal in AUDUSD can begin, medium- to long-term bears are sure to find current positioning attractive.
[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.