By James Hyerczyk
Fundamental and technical factors are both indicating that the Australian Dollar may have reached a top and could be setting up for the start of a long-term decline. This is especially evident on the monthly Euro/Australian Dollar Chart (EUR/AUD) which is showing signs of a bottom and a potential trend line breakout to the upside.
Supporting this potentially bullish chart pattern is the recent news that BHP Billiton, the world’s largest miner, had halted mining projects valued at more than $50 billion according to Credit Suisse and Deutsche Bank. While this announcement was being digested by investors, Australia’s resources minister, Martin Ferguson said, “You’ve got to understand, the resources boom is over”. Later he added that the Australian mining sector had done well with investors, calling it the “envy of the world”.
Calling an end to an economic boom that helped the country avoid a recession for over 20 years should be viewed as an indication that a major economic contraction could be forthcoming. So while Europe wrestles with its current problems, Australia may be facing serious problems of its own which could dwarf Europe’s woeful situation especially if an economic slowdown in China occurs simultaneously.
At this time, predictions of a recession are scarce. According to Bloomberg News, Australian growth is expected to exceed 3 per cent in 2013 and 2014, but Deutsche Bank sees dangers that others appear to be missing. Adam Boyton, chief economist for Australia at Deutsche Bank in Sydney sees export prices slumping as much as 15 percent against import prices during the last quarter of 2012. A change of this size has signaled a recession in three of the five times it has occurred over the past 50 years. Additionally, according to the Reserve Bank of Australia’s terms of trade (export prices against import prices) estimates, this measuring stick reached a 140-year high in 2011.
Technically, this fundamental assessment is being supported by the monthly Euro/Australian Dollar (EUR/AUD) chart. After reaching a low at 1.1600 on August 3, this currency pair has gone on a spectacular run to over 1.2100. As we approach the end of the month, the EUR/AUD is in a position to post a potentially bullish closing price reversal bottom on the monthly chart. This chart pattern coupled with a follow-through rally next month will be a sign that a major bottom could be forming.
The second strong bottoming signal will be a breakout over a downtrending trend line from the December 2008 top at 2.1025. The trend line formed by connecting this top to the May 2012 top at 1.3030 has been dropping .0195 per month for 44 months. In September, the trend line comes in at 1.2250. Long-term traders should watch the momentum on this breakout to gauge the strength of the move. Short-term traders may see resistance form following the initial test of 1.2315, the 50% level of the 1.3030 to 1.1600 range, but once this price is overtaken, increased momentum on rising volume should help take out the trend line.
The final piece of the bullish pattern will be in place if the currency pair can break through the swing top at 1.3030. A trade through this price will turn the main trend to up on the monthly chart. Once through this level, bullish sentiment should continue to grow especially if supported by a weakening Australian economy or if moves by the European Central Bank improve conditions in Europe.
In summary, recent comments by the Australian resources minister and the mothballing of major mining projects by BHP Billiton are strong signs that the Australian mining boom may be ending. If predictions are correct and a weakening Chinese economy leads to a decrease in demand for natural resources, then Australia’s economy may begin to contract. The possibility of a recession can be found on the monthly chart which is signaling a reversal to the upside. Further technical activity has to confirm the bottom, but all signs are pointing to the start of a long-term uptrend.