AUDUSD Monthly Technical Forecast
The longer term downtrend is expected to resume soon. What is unclear is whether or not weakness resumes before a push above .7275. A push there .7275 could complete a complex correction from .60. If the AUDUSD does exceed .7275, then there is potential resistance at .7566; the 100% extension of the rally from .6005-.7275.
AUDUSD Fundamental Outlook/Interest Rate Forecast
After pausing its steady rate regime recently, the RBA was put back on the defensive with a 25 basis point rate cut to 3.00 percent on April 7th. Policy authorities suggested record low borrowing costs warranted only a “modest adjustment” to the target rate; but these comments do not make up for the fact that the benchmark is at its lowest level in 49 years and growing speculation that the central bank will have to respond to growing troubles in Australia’s economy and financial markets. RBA Governor Glenn Stevens projected the first contraction in growth through 2009 in over two decades. And, as the global recession deepens, the Australian economy will suffer in turn. For rate speculation, the relatively high level of interest rates and pace of growth produce considerable downside risk; and investors have shown their caution through interest rate expectations. Only one more quarter point cut is expected in 12 months; but that will likely change.
Australian Dollar – US Dollar Valuation Forecast
The Australian Dollar is effectively at fair value, closing the month March a mere 54 pips off the PPP-implied exchange rate. Whether or not a lucrative imbalance will materialize seems to largely rest with the direction of risk appetite in weeks ahead. On balance, technical positioning suggests that the recent upswing in risky assets is corrective in the context of a larger downtrend. AUDUSD is over 95% correlated with the MSCI World Stock index, suggesting that any reversal in the market’s confidence will send the pair deeper into undervalued territory. Looking ahead further, the implications of broad-based quantitative easing may prove to be a source of strength of the Aussie in the long run, offering plausible reasons for both a medium-term decline and the eventual correction. For the time being, however, the pair does not look attractive from a valuation standpoint.
What is Purchasing Power Parity?
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 RED, while those that are overvalued are denoted in GREEN.
