MARKETS SPECTATOR: NAB's new Aussie

The bank has decided to update its present value Australian dollar model to reflect recent changes in the economic environment and market conditions. Based on a series of fundamentals, the model takes into account commodity prices, gold, risk appetite and yield differentials in determining a fundamental based level for the unit.

The previous model was based on weekly data from June 2000 until December 2009. In light of changing market conditions, the bank has extended this period to June 2011.

However, the bank believes that the recent increase in demand from the official sector for Australian triple-A rated assets, which began in mid-2011, is likely temporary rather than a structural change in the landscape.

Hence, it believes it is prudent not to include this data in the fundamental inputs into its model calculation.

"The coming week provides little new local information for the Australian dollar, although improved global sentiment and changing RBA expectations may push the Australian dollar to 1.0510,” NAB said. It also noted that we get the start of third-quarter GDP inputs, with capex and construction.

If we see a material change in expectations ahead of next week's Reserve Bank meeting then we will probably see a meaningful move in the Australian dollar. NAB believes the Reserve will remain on hold and notes that the market is currently pricing in a 59 per cent chance of a 25 basis point cut.

Source: Iress

Looking at the above price action, the last few months shows that the Australian dollar has been trapped in the 1.02 – 1.045 range. However, the last couple of days has seen it break out above the downtrend resistance line, indicating momentum is starting to build towards an upside breakout.

It looks like it is setting up for a test of the resistance line as well as psychological resistance around the 1.05 figure. A breakthrough here would likely see cautious bulls bid the dollar up towards the 1.06 mark, where there is likely to be further selling pressure.