As the Aussie dollar hovers near four-year lows against the U.S. dollar amid calls for the Australian central bank to pursue easing measures as economic growth slows, charts suggest further downside.
The Australian economy grow 2.7 percent on year in the July-September period, data showed last week, below expectations for a 3.1 percent rise as the country's commodity boom winds down.
Below-view growth figures prompted calls for the Reserve Bank of Australia (RBA) to cut interest rates. Last week, Deutsche Bank forecast two 25 basis-point rate cuts in 2015.
Despite the prolonged downtrend in the Australian dollar, the currency has moved between two broad trading bands defined by support and resistance levels. These bands provide a method to set the potential downside targets for the move below $0.865.
The weekly AUD/USD chart shows a strong support level near $1.015 that was broken in May 2013. The Australian dollar then moved to test lower support near $0.94. This did not act as a strong support level, but it did develop into a strong resistance level that capped the Australian dollar's rise from April to September 2014.
The width of the trading band between $0.94 and $1.015 was projected down to give the downside support target near $0.865. This was a technical support level and it was proven effective in February 2014 and again in recent weeks from October to November.
The fall below support at $0.865 is critical.
On a technical basis, this puts the next support level near $0.79. This technical target is validated on a monthly chart. It acted as a strong resistance level in March and October 2004, from February to March 2005 and December 2006 to February 2007. It played a limited role as support resistance in 2008 and 2009.
The long-term chart confirms that $0.79 is a reasonable historical support level. This is well above the "Pacific peso" level around $0.62 achieved in late 2008 and early 2009.
This can be traded as a long-term trend. Our preference is to trade this downward pressure on an intraday basis using the ANTSSYS approach to limit risk. The continued collapse of the Australian dollar confirms its re-transition from a profitable carry trade in the period 2011 to 2013, to a currency at the mercy of commodity prices. The Australian dollar has suffered two king hits. The first is the collapse in commodity prices. The second is the rapid increase in the U.S. dollar to $0.89 and higher. The technical target of $0.79 will satisfy the RBA, but it also signals a significant structural change in the Australian economy as the commodity engine stalls.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.