Aussie’s Gain to Yen Seen Illusory in Momentum: Market Reversal

Feb 13, 2014 12:33 pm ET

Feb. 13 (Bloomberg) -- The Australian dollar is poised to reverse its advance to a one-month high against the yen, trading patterns suggest, after the currency pair tracked a recovery in investor appetite for riskier assets.

The Aussie had climbed 3.6 percent versus its Japanese peer this month as of yesterday, the biggest gain among 31 major currencies tracked by Bloomberg, pushing an indicator of its momentum close to levels investors regard as unsustainable. Australia’s dollar also approached the upper limit of a measure known as the Bollinger band, suggesting a reversal is imminent.

Australia’s dollar is among the best-performing Group of 10 currencies versus the dollar this month, while the yen is the worst, as stocks recover from losses that drained more than $800 billion from global markets this year. Any decline in the currency pair may be exacerbated if the recent equity rally runs out of steam.

“There’s more risk of downside than upside in Aussie-yen over the year if asset markets prove nervous,” John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Copenhagen, said in a Feb. 10 phone interview. “The yen is still extremely correlated with risk appetite, so everyone unwinds short positions when we see pain in markets,” he said, referring to bets an asset will decline.

The Australian dollar rose to as high as 92.974 yen yesterday, its strongest level since Jan. 16, and was at 91.79 yen at 12:32 p.m. in New York. The currency pair has been climbing since reaching a five-month low of 88.244 on Feb. 3, when a rout from emerging-market assets started to reverse.

Gains Exhausted

The Aussie tumbled today after data showed Australia’s payrolls unexpectedly declined last month, while the unemployment rate jumped to the highest in more than 10 years.

The currency’s average directional index versus the yen fell to 19.3, just below the 20 level that suggests the strength of its advance has been exhausted. The ADX is derived from the Directional Movement Index, which allows traders to see the trend of a currency using today’s high and low relative to the previous day’s range.

The Aussie-yen cross, which is a bellwether of investor appetite, may meet resistance at the 200-day moving average after it fell below that level in June, according to Takuya Kawabata, a Tokyo-based analyst at Gaitame.com Research Institute Ltd., a unit of Japan’s largest provider of foreign- exchange margin trading.

“If the 200-day moving average proves hard to break, there’s a good chance that the cross will reverse lower,” he said by phone yesterday. The average stood at 92.44.

Stocks Correlation

A statistical measure of how much the Aussie-yen pair moves in line with Standard & Poor’s 500 Index futures is at its highest level in more than a year.

The 120-day correlation between the currency pair and the stock-index futures climbed to 0.67 this week, the highest since December 2012, from 0.47 in November, according to data compiled by Bloomberg. The measure reached as high as 0.87 in July 2010. A reading of 1 would indicate the two assets move in lockstep.

Other technical indicators also signal a reversal in the Aussie’s gains versus the yen.

The last time the pair came this close to the top of its Bollinger Band was Jan. 13, when the Australian dollar went on to tumble 6 percent versus its Japanese counterpart in three weeks. The currencies’ stochastics chart also indicates that the Aussie has reached overbought levels against the yen.

Gaitame.com’s Kawabata cited a measure known as the Ichimoku chart, which seeks to predicts a currency’s direction by analyzing the midpoints of historical highs and lows. The chart’s cloud refers to the area between the first and second leading span lines on the chart and is used to show an area where buy or sell orders may be clustered.

Ichimoku Cloud

Both daily and weekly Ichimoku charts show the cloud is close to the 200-day moving average, Kawabata said. An inability to break above that area would bring the chart’s base line of about 91 into focus and a break there may prompt the currency pair to fall toward 88 yen, he said.

A key test will be if Australia’s dollar closes above a trend line that connects a high of 95.69 yen reached on Oct. 22 and the 94.15 peak of Jan. 1, according to Chris Weston, the Melbourne-based chief market strategist at IG Ltd. Demand for higher-yielding assets funded by currencies with lower borrowing costs -- known as the carry trade -- may push the Aussie above that level, he said.

“Equity markets are moving higher and sentiment is strong, and in that environment carry trades work extremely well,” Weston said in a phone interview on Feb. 12.

Equity Outlook

Stocks jumped in Asia yesterday after government data showed imports and exports exceeded analysts’ estimates last month in China, the world’s second-biggest economy. A day earlier, the S&P 500 index rose as Federal Reserve Chairman Janet Yellen said U.S. economic growth has picked up and that policy makers will reduce stimulus in “measured steps.”

While the equity market may extend gains, its rally will probably lose momentum toward mid-year after earnings and economic activity disappoint investors, Derek Mumford, a director at Rochford Capital, a currency risk-management company in Sydney, said by phone yesterday.

“If we get equity market uncertainty and a potential sizable correction, the Aussie will depreciate against pretty much everything,” he said.

--Editors: Naoto Hosoda, Paul Armstrong