Trading patterns suggest the worst may be over for the Australian dollar after plunging 9.5 percent in the past six months, as the Reserve Bank approaches the end of its interest-rate cutting cycle and China’s economy recovers.
The Aussie may climb toward 93.07 U.S. cents if it can breach key resistance levels after rallying twice last month from about 89 cents, forming a so-called double-bottom base, according to Junichi Ishikawa, a Tokyo-based analyst at IG Markets Securities Ltd. The currency traded at 92.57 U.S. cents as of 4:50 p.m. in Sydney.
A resumption of Aussie strength would post a challenge for Prime Minister-elect Tony Abbott as he tries to transition the nation’s economy away from mining investment-led growth. The RBA Governor Glenn Stevens reiterated last week that depreciation in the currency would “help to foster a rebalancing of growth in the economy.”
“There are some green shoots appearing in Asia,” said Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking Corp., Australia’s second largest bank. “The recovery in the Australian dollar could continue further from here.”
The Aussie, the world’s fifth-most-traded currency, reached a three-year low of 88.48 cents on Aug. 5. Its 8.1 percent drop in 2013 is the second-biggest decline among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, trailing only the yen’s 10 percent plunge.
“The Aussie sell-off towards the end of August was a little bit overdone,” said Derek Mumford, a director at Rochford Capital, a foreign-exchange risk-management company in Sydney. “The 92.30 area is quite an important level. I do expect it to be eroded and to move up on towards 94 in the next few days.”
Recent reports in Asia have relieved pessimism that weighed on the Aussie. Chinese government data this month showed that the nation’s manufacturing industry expanded at the fastest pace in 16 months, while export growth and industrial output beat economist forecasts. In Australia, a report last week showed economic growth unexpectedly accelerated last quarter.
Westpac’s Positive Surprise Index for Asia, which shows if data beat or missed economists’ expectations, rose to 71.97 on Sept. 6, a level unseen since January 2011.
“If we can break through the 92.30-92.40 key resistance level, then we can get to 93 cents,” said Westpac’s Cavenagh.
Technical indicators are signaling that the Aussie has bottomed out and may recover some of its losses this year. Its 89-day moving average is currently sitting at 93.07 cents. That level crosses the upper end of the cloud on the daily Ichimoku chart.
“The Australian dollar is supported around the 89 U.S. cents level,” said IG’s Ishikawa. “The 89-day moving average has been a strong resistance point since April 16, so whether the Aussie can break above that would be the key to whether it can resume higher.”
The Aussie rose above the lower end of the Ichimoku cloud last week for the first time since May. Its conversion line, which plots the sum of the highest high and lowest low over the prior nine data points, climbed above the base line, which uses the same calculation over the past 26 points. Both are bullish signals for the currency, Ishikawa said.
The cloud refers to the area between the first and second span lines on the chart and is used to show an area where trading orders may be clustered.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the Australian dollar compared with those on a gain -- so-called net shorts -- was 71,506 on Sept. 3. It reached 76,779 on Aug. 6, the most bearish on record going back to January 1993, according to figures from the Washington-based Commodity Futures Trading Commission.
“The market is still quite short the Aussie,” said Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia, the nation’s biggest lender. The U.S. dollar will give up some of its recent gains as “the market reevaluates the risk of the Fed tapering its asset purchases.”
There’s a “good chance the Aussie could get close to 94 cents” in the coming one to two weeks.
The Australian dollar had held above $1 from June 2012 to May 9, the longest stretch above parity since it was freely floated in 1983. It depreciated as China’s outlook deteriorated and Federal Reserve Chairman Ben S. Bernanke signaled a reduction in the U.S. central bank’s bond purchase program, which tends to debase the greenback.
“The Australian dollar sub-90 had all the bad news priced in -- speculative shorts at all-time high, interest rates falling to record lows and China’s economy slowing,” said Minori Uchida, the Tokyo head of global market research at the Bank of Tokyo-Mitsubishi UFJ Ltd., unit of Japan’s biggest bank group by market value. “The currency looks close to a bottom, but we need to continue to see improvement in Chinese data and higher Australia’s terms of trade to see a solid rebound.”
The RBA refrained from cutting interest rates last week and omitted a reference to scope for further stimulus. Interest-rate swaps data compiled by Bloomberg show traders see a 34 percent chance the central bank will reduce benchmark borrowing costs from a record 2.5 percent this year.
“RBA policy makers were quite happy when the Aussie was down towards 90,” said Rochford’s Mumford. “If we get the Aussie back towards 97-98, they will start to talk the Aussie down again and put further rate cuts back on the table, but at the moment, I think they’re very much on hold.”