[B][B]Australian Dollar / US Dollar Monthly Technical Forecast[/B][/B]
Forecasting with Elliott is all about identifying 5 and 3 wave movements. A 3 wave movement is considered countertrend. A 5 wave movement is part of the larger trend. The rally from the 2001 low in the AUDUSD is in 3 waves. A view of the daily chart would show that the decline from .9856 is in 5 waves. Even the rally from .6005 is in 3 waves - the third of those waves is a bit more than 161.8% of the first wave. This level is close to the 61.8% retracement of the decline from .9856. Stalling at the Fibonacci confluence (as well as the January 2008 low near .8500) should be respected. Expectations are for a sharp decline.
The Australian Dollar/US Dollar exchange rate continues to track interest rate expectations as the pair has been supportive by the rising Australian interest rate outlook which rose to 183 from 152 bps in the past month. The spread in yield expectations nearly doubled from a month from 59 to 103 which helped the AUD/USD set a new yearly high. The bullish outlook was reinforced by RBA governor Stevens, who had a decidedly hawkish bias to his tone after the central bank left rates unchanged at 3.00% in August. He warned that leaving rates low for too long would create upside risk for inflation. The Australian economy saw a consecutive quarter of growth as it has technically avoided a recession with only the fourth quarter of 2008 seeing a contraction. However, the outlook for the economy and the Australian dollar are closely linked to commodity prices and China’s fortunes, which have dimmed a bit. This could limit upside potential for the pair subjecting it to range bound price action.
[B][B]Australian Dollar / US Dollar Valuation Forecast[/B][/B]
[B]AUDUSD Valuation Forecast: [/B][B]Bearish[/B]
The Australian Dollar held relatively steady through most of August as slowing momentum in the global risky assets rally began to take some of the steam out of the high-yielding currency. In the near term, the single indicator to be followed here remains the trajectory of global equity markets. Indeed, AUDUSD now shows a staggering 96.3% correlation with the MSCI World Stock Index. Although equity valuations backed off a bit in August, prices are still trading at the highest levels since 2003 relative to earnings, all in a year when the global economy is expected to shrink for the first time since the Second World War. If the return of liquidity in September brings a correction in risk appetite, the Australian Dollar will be pushed lower towards its PPP-implied exchange rate, offering traders a lucrative value gap of over 1300 pips to be exploited.
[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.