Feb. 28 (Bloomberg) -- Australia’s dollar will reverse its biggest monthly gain since September, trading patterns suggest, as decade-high unemployment and a slump in business investment spur speculation interest rates will decline.
The Aussie climbed 2.4 percent this month, the largest advance among 10 major peers after the currencies of Norway and New Zealand. A close below the key level of 89.20 U.S. cents, the 38.2 percent Fibonacci retracement of the currency’s gain from a 3 1/2-year low, would signal further declines, IG Ltd. said. The moving average convergence-divergence, or MACD, turned bearish this week after falling below a so-called signal line for the first time in almost a month.
“A close below that level would be quite significant and, I think, we’d look to trade down to the 88.20 level and then perhaps even further,” said Chris Weston, the Melbourne-based chief market strategist at IG. “If the Reserve Bank do decide that they want to adopt their easing bias again, which is a phenomenon that could easily happen, that would be a game changer.”
Australia’s currency reached a high on Feb. 18 when the RBA released minutes from this month’s meeting, when it held record-low rates while dropping an easing bias and refraining from attempts to talk down the exchange rate. The Aussie retreated 1.3 percent from that peak after jobless and capital spending figures added to concern the economy is struggling to manage the end of a mining investment boom.
The Australian dollar traded at 89.63 cents as of 5:45 p.m. in Sydney, dropping from the five-week high of 90.81 reached Feb. 18. It touched 86.60 on Jan. 24, the least since July 2010.
The Aussie touched a three-week low after a statistics bureau report yesterday showed capital spending slid 5.2 percent in the quarter ended December from the previous period, a result worse than the most bearish estimate in a Bloomberg News poll. Australian employers unexpectedly cut positions in January, pushing the jobless rate to 6 percent, the most since July 2003, data on Feb. 13 showed
Losses in the currency may accelerate after a central bank meeting on March 4. Swaps traders yesterday bet on a 36 percent chance the Reserve Bank of Australia will cut interest rates from a record-low 2.5 percent by the end of August, up from 18 percent the previous day, data compiled by Bloomberg show. It lowered borrowing costs by 225 basis points over two years before signaling on Feb. 4 a “period of stability” in rates.
“There is no change in the situation where the Australian economy needs low interest rates and a weak currency with the resource investment boom over and the Chinese economy slowing,” Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo, said yesterday. The bank predicts the Aussie will drop to 80 cents in 12 months.
MACD, which provides buy and sell signals, shows that the Australian dollar’s trend and momentum conditions are deteriorating, with the indicator below the signal line and edging closer toward the zero line.
The Aussie this month failed to breach resistance that contains the January high of 90.86 and the 38.2 retracement of its drop since late October. That puts the focus on support from 89.35 cents to 89.05 cents, according to JPMorgan Chase & Co.
“That will be the key test now and if it breaks, we’ll probably see a little more of a flush back down towards the low 88 area,” Niall O’Connor, a New York-based technical analyst at JPMorgan said in a phone interview yesterday. “That should be where Aussie should try to dig in and hold.”
The decline in business investment prompted Citigroup Inc. to lower its fourth-quarter gross domestic product forecast to 0.4 percent from 0.6 percent, while estimating a spending drop of as much as 25 percent next fiscal year based on investment intentions in the statistics bureau report.
Adding to the sluggish domestic outlook is the prospect of a slowdown in China with a manufacturing gauge released by HSBC Holdings Plc and Markit Economics on Feb. 20 falling to the lowest level in seven months.
Prices for 62 percent iron ore delivered to China’s port of Tianjin declined to $117.80 a metric ton on Feb. 26, the lowest since July 1. Iron ore is Australia’s biggest export.
“With the fundamentals in terms of domestic investment and iron ore prices looking poor, the Aussie is probably going to weaken,” said Tim Kelleher, the head of institutional foreign-exchange sales in Auckland at ASB Bank Ltd. “You’ve got to wonder if it just starts to slip, slide away.”
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