The Australia and New Zealand dollars, suffering their steepest declines in as much as five years, are due for a respite with trading patterns suggesting a reversal may be coming.
Both currencies pushed through the lower limit of an indicator known as the Bollinger band in the past week, which analysts use to help identify the turning point in an asset’s trajectory. The Aussie’s 14-day relative-strength index failed to make new lows this month, even as the currency weakened to its lowest since September 2010, a pattern that often precedes a rally, Australia & New Zealand Banking Group Ltd. (ANZ) said.
“Standard momentum indicators are diverging, so it suggests that there should be a squeeze,” Tim Riddell, ANZ’s head of global markets research in Singapore, said in an interview. “The longer-term profile is that those squeezes, should they occur, should be used to build shorts in both Aussie and kiwi,” he said, referring to bets that the currencies will resume their declines after appreciating.
Federal Reserve Chairman Ben S. Bernanke said on June 19 that the central bank may pull back on its stimulus efforts as soon as this year if it sees a sustained improvement in the world’s largest economy. That helped weaken currencies of nations with relatively high interest rates, including Australia and New Zealand.
The Australian dollar’s 11 percent decline against its U.S. counterpart this quarter is the biggest since it plunged to a five-year low of 60.09 U.S. cents after Lehman Brothers Holdings Inc.’s collapse in 2008, according to data compiled by Bloomberg. The New Zealand currency, known as the kiwi, fell 6.6 percent since March, heading for its biggest quarterly loss since September 2011.
The Aussie weakened to an almost three-year low of 91.48 cents on June 24, before rebounding to 92.77 cents as of 12:14 p.m. in New York. The New Zealand dollar fell the same day to 76.84 cents, the lowest in a year, before recovering to 77.77 cents today.
The Australian dollar may rise toward 97 U.S. cents and the kiwi toward 80.5 cents in the next two months, before weakening to as low as 85.5 cents and 73.25 cents by year-end, Riddell said.
When Australia’s currency fell below its lower Bollinger band in late-February, it went on to climb 4 percent over the following six weeks, data compiled by Bloomberg show. A similar move in the kiwi’s indicator preceded a 5 percent advance.
The lower limit of the band, developed by John Bollinger in the 1980s, 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 Australian dollar’s 14-day relative strength index was 34. It was at 29 on June 20, below the 30 level taken by traders to signal a security is due to reverse recent declines, and failed to make a new low on June 24 when the Aussie fell to its weakest level since September 2010. The last time the Aussie climbed back above the 30 threshold, on June 3, it reflected a 2.1 percent rally, its biggest one-day gain since November 2011. The kiwi’s RSI was at 40, compared with 33 on June 25.
“The Aussie and kiwi have probably overshot and should appreciate from here,” Alvin Pontoh, a Singapore-based Asia-Pacific strategist at TD Securities, said in an interview. “We’ve had to slash our Aussie forecasts to keep up with what’s happening, but still see both currencies higher by year-end.”
Analysts have lowered forecasts for the Australian and New Zealand dollars by the most among major currencies since the end of April, data compiled by Bloomberg show.
They predict that the Aussie will end the year at 95 U.S. cents, down from a $1.03 estimate two months ago, while the outlook for the kiwi was cut to 80 cents from 84 cents.
The Aussie may find further support as it appreciates, based on Fibonacci retracement signals which indicate support at the 91.45 level, according to Niall O’Connor, a technical analyst at JPMorgan Chase & Co.
“For the very short-term picture, strength back above the 94.35 area would imply the price action is stabilizing with a growing risk that a deeper upside retracement is under way,” New York-based O’Connor wrote in a June 25 note.
Fibonacci analysis, based on the work of 13th century mathematician Leonardo of Pisa, is founded on the theory that prices rise or fall by certain percentages after reaching a new high or low. In this 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.
As well as the prospect of less money being pumped into the global economy, investors also turned bearish on the Australian and New Zealand dollars because of slowing growth in China, the biggest export market for both South Pacific nations.
Gross domestic product in the world’s second-biggest economy expanded 7.7 percent in the first quarter, down from 7.9 percent in the previous three months.
Traders in the futures market are holding record wagers on further declines in the Aussie.
Traders swung to a record 63,521 net position betting on Australia’s currency to weaken against the greenback on June 18, from record net long contracts of 103,376 on Dec. 11, data from the Commodity Futures Trading Commission in Washington show. They cut bets on kiwi gains to 2,126 on June 18, the lowest in a year, from a record 30,808 on April 16.
“Aussie speculative shorts are at record levels which historically have typically portended sharp reversals,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, said in an interview. The Australian dollar needs to get above a key resistance level of 93.8 U.S. cents to post further gains, she said.
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