AUD/USD has been sliding consistently from the year’s highs and that broad downtrend remains very much in play. Relative interest-rate prognoses are doing much of the damage. The US Federal Reserve is expected to raise its own rates again this month and, should it do so, it will be a significant moment not just for the US Dollar but for the Aussie too.
What may be potential ‘fair value’ for the AUD/USD?
US yield is certainly closing up the gap with the AUS yield, as shown below in the following comparison (using 10Y government bond yield of US and Australia):
As the yield differential is declining, we are seeing corresponding decline in the AUD:
As shown below, the regression analysis shows that there is significant statistical relationship between the AUD/USD and the yield differential. At current yield differential of 0.1485%, the forecasted AUD/USD ($0.7368) is relatively higher than the actual AUD/USD ($0.7605), thereby signifying potential future weakness associated with the AUD given the fact the US rate hikes are imminent.
The 95%-confidence interval for the forecast AUD/USD is between $0.6041 and $0.8694.
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