Aussie Disconnecting With Economy in 5% Plunge: Market Reversal

Australia’s growing economy will put a floor under the nation’s currency, sparking a rebound from its steepest decline in a year, trading patterns suggest.

The Australian dollar’s 5.2 percent slide this month cut its 14-day relative strength index to 23, breaching the 30 threshold that signals a currency has fallen too far, too fast. The so-called Aussie also pushed through the lower limit of what traders call the Bollinger band, implying an imminent reversal.

The currency started tumbling amid a slowdown in China, the biggest customer for Australia’s commodity exports, and interest-rate cuts aimed at maintaining the South Pacific nation’s competitiveness. Australia’s above-average growth, its AAA credit rating and relatively high benchmark interest rate of 2.75 percent makes its bonds attractive to international investors, underpinning the currency.

“I expect a rebound,” said Genzo Kimura, a Tokyo-based investor at Sumitomo Mitsui Trust Asset Management Co., which oversees the equivalent of $41.2 billion. “Central banks like buying Aussie dollars. When it becomes too weak, central banks love to buy.”

The Australian dollar’s depreciation this month is the biggest drop since it lost 6.7 percent in May 2012. The following month, it jumped 5.2 percent. Its slide is the largest among the 31 most-traded currencies tracked by Bloomberg against the U.S. dollar.

Breaching Band

The Aussie weakened to an 11-month low of 97.98 U.S. cents, and was at 98.33 cents at 12:51 p.m. in New York. That was less than the lower Bollinger band of 98.91 U.S. cents. When the currency fell below the lower Bollinger band in March, it strengthened more than 4 percent over the following five weeks.

Bollinger bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset’s trajectory. The lower limit of the band represents two standard deviations from the 20-day moving average and typically implies that the likelihood of the currency dropping below the band is about 2.5 percent.

The relative strength index has dropped from this year’s high of 67.7 on Jan. 10, when the Aussie closed at $1.0598. While a reading below 30 indicates a currency is “oversold,” anything above 70 indicates it’s “overbought.”

Option Premiums

The premium for one-month options granting the right to sell the Aussie against the U.S. dollar relative to those allowing for purchases was 2.1 percentage points, up from 1 percentage point at the beginning of May, 25-delta risk reversal rates show. A so-called Z-score of 2.1 means the premium is more than two units of standard deviation from the 20-day average.

In these and other forms of technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a currency, security or index.

Australia’s status as a top-rated haven for investors’ money is propping up its currency, Treasurer Wayne Swan told reporters in Canberra yesterday. That was a day after he said the government is willing to run budget deficits to avoid job cuts.

While growth in gross domestic product will probably slow to 2.65 percent this year, that’s still above the average of 1.09 percent for the Group of 10 nations, according to Bloomberg News economist surveys. At 2.75 percent, the central bank’s key rate compares with a range of 0 to 0.25 percent in the U.S., 0.5 percent in the euro zone and Japan’s 0 to 0.1 percent.

‘No Problem’

“There’s no problem in the Australian economy,” said Aaron Chen, who trades the Australian dollar in Taipei at Shinkong Life Insurance Co., which has the equivalent of $57.5 billion in assets. “The main purpose of the budget deficit is to strengthen the economy,” and that’s positive for the currency, which “will rebound,” said Chen.

Chen forecasts the Aussie will climb to $1.02 in a month. The average over the past decade is 85.39 U.S. cents.

Australia has stable AAA ratings from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, along with Canada, Denmark, Finland, Norway, Singapore, Sweden and Switzerland. S&P and Moody’s affirmed Australia’s grade after this week’s budget.

The currency is held by as many as 34 central banks, including those in China, Russia and Singapore, the Reserve Bank said in documents released in February under a Freedom of Information Act request.

China reported April 15 that gross domestic product expanded 7.7 percent in the first quarter from a year earlier, versus 7.9 percent in the fourth quarter of 2012.

Reserve Bank of Australia Governor Glenn Stevens responded by lowering the target for overnight loans from 3 percent. The odds of a reduction to 2.5 percent at the next central bank meeting on June 4 are about 23 percent, rising to 79 percent for a cut by November, swaps data compiled by Bloomberg show.

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