Australian Dollar has fallen through what Dow Jones Newswire believes is critical support. Selling wave expected

From Dow Jones (James Glynn)

SYDNEY--There could be a wave of selling in the Australian dollar if the currency breaks an important support level, traders warned on Thursday.

The Aussie is testing technical support around US$0.9850--a significant signpost for the unit in recent years, traders said.

'This level is something in the back of all traders' minds and holds a historical significance,' Easy Forex head of foreign exchange markets for Asia-Pacific Francisco Solar said.
Over the past two weeks the Australian dollar has fallen about 5% against the U.S. dollar. Late on Thursday it was at US$0.9877--having been as low as US$0.9855 late on Wednesday.

The Australian dollar won't fall below this critical support, ANZ Bank head of global markets research Richard Yetsenga said. Recent selling is linked to speculation the U.S. will start withdrawing the economic stimulus that has seen its dollar rise, he said adding that it is too early for the Federal Reserve to contemplate this.

Concerns about Australia's mining boom ending suddenly are exaggerated, Mr. Yetsenga added. There is enough momentum in mining investment to ensure it will taper off instead of grinding to a halt, Mr. Yetsenga said.

The US$0.9850 milestone was the peak in the Australian dollar's rally in 2008 before the unit collapsed 40% after the demise of Lehman Brothers and a world-wide financial crisis. It was a hurdle as the Australian recovered before finally breaking above parity with the U.S. dollar in late 2010. The Australian dollar fell below US$0.9850 and all the way to US$0.9700 a year ago during the European sovereign debt crisis.
U.S. investment bank Goldman Sachs warned this week the Aussie is increasingly too expensive as commodity prices slide. Goldmans expects the Australian could go as low as US$0.8000 in the next year.

'Ultimately the combination of subtrend economic growth, lower short-term interest rates, a sustained fall in the terms of trade as global iron-ore and coal prices adjust to rising supply and the reversal of unhedged capital flows leave the Australian dollar scope to 'catch down,'' it said this week in a client note.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires