Euro to Snap Confidence-Driven Gain to Aussie: Market Reversal

Dec 20, 2013 5:24 am ET

Dec. 20 (Bloomberg) -- The euro is poised to reverse this year’s record jump against the Australian dollar as trading patterns signal its 21 percent gain is overdone.

The euro has been one of the surprises of 2013, rising against all but one of the Group-of-10 developed currencies, even with an economy that’s expected to shrink this year. Its biggest advance after Japan’s yen was against the Aussie, climbing to an almost four-year high of A$1.5578 on Dec. 18.

That’s in an area that acted as a support for the 17-nation shared currency in 2005, 2007 and 2008 before forming a barrier to further gains in 2010, according to Citigroup Inc., the second-biggest foreign-exchange trader. The pair’s 14-day relative strength index has been above 70 since Dec. 4, suggesting the euro may be due to weaken.

“If we held that area, even as just a corrective move, we think euro-Aussie can get back to 1.40 to 1.42,” Tom Fitzpatrick, the New York-based chief technical analyst at Citigroup, wrote in an e-mailed response to questions yesterday. “Even as a correction it could be significant.”

The euro has been above A$1.40 since July and was at A$1.5387 as of 10 a.m. in London. Its gains this year follow a change of less than a cent in 2012, which was preceded by a 36 percent slump from 2009 through 2011.

Draghi’s Pledge

The euro has been buoyed since European Central Bank President Mario Draghi pledged in July 2012 to do “whatever it takes” to preserve the currency union. The ECB’s audit of the financial system encouraged lenders to repatriate overseas assets and repay emergency loans, while its planned review of lenders’ balance sheets early next year has boosted confidence and supported the euro.

“The euro is being artificially propped up at the moment and it’s diverged from the fundamental backdrop,” Peter Dragicevich, a currency strategist in Sydney at Commonwealth Bank of Australia, said by phone yesterday. “Once that passes early in the New Year,” the euro may “come off broadly,” he said, predicting a decline to A$1.50.

Euro-area gross domestic product will grow just 1 percent in 2014 following a 0.4 percent contraction in 2013, according to Bloomberg surveys of economists. Australia will expand 2.4 percent this year and 2.8 percent in 2014, the surveys predict.

The European Union lost its top AAA credit rating from Standard & Poor’s today, with the firm citing the deteriorating creditworthiness of the bloc’s 28 member nations.

Surprise Advance

While it fell today, the euro has strengthened 3.4 percent against the dollar this year, climbing to a two-year high of $1.3832 on Oct. 25. At the start of this year, analysts surveyed by Bloomberg predicted a slide to $1.27 by Dec. 31, compared with the current level of $1.3645.

The common currency’s gains against the Australian dollar came as the respective central banks reduced their benchmark interest rates to records.

Traders see a better than 60 percent chance that the Reserve Bank of Australia will refrain from cutting its benchmark rate from 2.5 percent by July, data compiled by Bloomberg on overnight-index swaps show. The ECB unexpectedly halved its main rate to 0.25 percent last month.

The euro swung from a record-high of A$2.1136 in October 2008 to an all-time low of A$1.1606 in August 2012 as investors rattled by Europe’s sovereign-debt crisis fled to the perceived safety of Australian assets.

Prior to the financial crisis, the euro fell to lows of A$1.5539 in 2005, A$1.5476 in 2007 and A$1.5925 in 2008. In 2010, after the European currency entered a longer-term decline, it faced selling pressure at A$1.5462 on a bounce in May.

‘Makes Sense’

“Euro-Aussie is getting to levels where it makes sense for it to be on a longer-term basis,” said Tim Riddell, the Singapore-based head of Asian global-markets research at Australia & New Zealand Banking Group Ltd. The euro may stall in a range of A$1.50 to A$1.55 before resuming its advance toward A$1.64, he said. That would be the strongest level since December 2009.

Citigroup’s Fitzpatrick said a weekly close above the A$1.55 to A$1.56 area would prompt him to reassess the potential for a further rally. The euro ended last week at A$1.5332.

Stochastics, which study the velocity of asset-price movements, show the euro has been overbought against the Aussie for a month. The measure’s k-line climbed to 99.5 percent on Dec. 11, the highest since August, and for more than a month till yesterday it has been near or above the threshold of 70 that suggests a currency has risen too far.

A failure by the euro to break its 120-month average near A$1.5550 will drive a correction lower to the 12-month moving average level near A$1.3963, Kumiko Ishikawa, a currency analyst at Gaitame.com Research Institute Ltd., said by phone yesterday.

--With assistance from Hiroko Komiya, Kevin Buckland and Naoto Hosoda in Tokyo. Editors: Masaki Kondo, Paul Armstrong