More downside likely for the Australian dollar

2018 has been a rather downcast year for the Australian dollar (AUD). This year, the Reserve Bank of Australia (RBA) kept interest rates unchanged at a low of 1.5 per cent - for a record 28 consecutive months. The continued dovish tone in the RBA Statement on Monetary Policy further hints that there was no strong case for a near-term adjustment in monetary policy, which would result in the AUD weakening further.

Economic numbers have been on the decline in Australia. Its third quarter GDP results indicated further weakness. This is attributed to a slowdown in household spending, which resulted in the weakest quarterly expansion since the third quarter of 2016. This reinforced investors' concerns of muted economic growth despite the recent rebound in employment numbers and continued low unemployment rate. The pestering issues of low wage growth, subdued CPI inflation, and falling housing prices created a disinflationary backdrop. It will prevent policy normalisation for some time. In addition, the 2019 outlook appears to be more challenging, due to potential trade tariffs and protectionism policies, which have lowered expectations of economic growth. Therefore, such factors will deter the RBA from raising interest rates next year, causing more downside risk for the AUD.

Looking at the daily charts of AUD/SGD pair, after recording its year high of 1.0633 on Jan 29, the AUD/SGD had slumped to a year low of 0.9713 on Oct 26. There are three technical signs which support this strong downward trend.

Firstly, since February, the AUD/SGD pair has been well below the 200 EMA (exponential long-term moving average), indicating that the underlying trend of the AUD/SGD pair is bearish. Although prices tested the 200 EMA on two occasions between mid-November and early-December, it failed to break above the strong resistance and retraced thereafter. This shows that the selling pressure is strong. At present, prices are below the exponential short-term moving average (50 EMA) as well, indicating that it is still on a downtrend.

In addition, a classic reversal pattern, known as "head and shoulder", has started developing since early-November. The neckline will be the upper band of the descending channel, which formed between mid-February and early-November. On Dec 19, prices finally broke below the neckline, and the target price will be at 0.9713, which represents a 0.54 per cent downside.

Lastly, by placing a Fibonacci retracement (drawn from the 1.0633 year high on Jan 29 to the 0.9713 year low on Oct 26), we see that the target price of the "head and shoulder" coincides with the zero per cent mark of the Fibonacci retracement level. This level would function as a strong support level, thereby increasing the odds of the target level being reached.

With all these points taken into consideration, it is likely to continue to head south with the possibility of testing the year low of 0.9713. Hence, investors who are bearish can take this level as a guide to take profit. Should this level be broken, the next support will be 0.9510.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.