EUR/AUD Range Waits For Shift in Risk Trends

The Australian dollar erased earlier weakness on the back of an improving outlook for the global economy. Although U.S. equity markets are down on the day, they have managed to recover a portion of the opening dip. Weak fundamental from the U.S. dimmed prevailing optimism but commodity prices have remained firm with oil in positive territory, signaling that traders are still positive on the global economy. The Euro has also been a beneficiary of existing optimism but doesn’t possess the same level of sensitivity to risk trends as the high yielding Aussie. Therefore, the single currency is favored if bearish sentiment returns which would keep the EUR/AUD confined to its current range. Additionally, last night’s weakness following the RBA rate hold signaled that yield expectations still hold a role in determining direction. Markets are now expecting the central bank to remain on hold for the remainder of the year which may become a weighing factor for the com-dollar.

Levels to Watch:

-Range Top: 1.5000 (Range, Pivot)

-Range Bottom: 0.8475 (Range, Pivot)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Long: Place an entry at 1.4600- above 20-Day SMA
• Stop: Set the stop to 1.4500-100 pips in risk
• Target: The first target is 1.4800-followed by 1.4927-7/20 high

Trading Tip – The EUR/AUD has already bounced from our lower bound which could signal that we missed out on a better entry point. However, the 20-Day SMA at 1.4511 has provided resistance and a break above the technical level would be better confirmation of a bullish reversal. A re-test of the lower bound can’t be ruled out, which will give those with more risk tolerance an opportunity to take advantage of the better entry point and additional profits. There is also a tighter shorter term range that has developed between 1.4300 and 1.4600 which could provide profit opportunities.

Event Risk for Europe and Australia

Europe – The upcoming ECB rate decision will be the marquee event on the week for the Euro-zone but make pack little punch as the central bank is expected to remain on hold. President Trichet’s remarks in the preceding press conference could impact markets if they point to a future change in policy. Policy makers could decide to terminate their debt purchase program which could be viewed as a vote of confidence for the region or spark concerns that the move increases the potential for sovereign yields to rise again. E.Z. retail sales, German factory orders and industrial production are all expected to have improved from the prior period providing evidence of a sustaining recovery. The positive fundamental data could raise the outlook for future tightening regardless of the central bank’s tone.

Australia – Australian fundamentals may see their influence dwindle with the RBA expected to remain on hold for the foreseeable future. However, a spike in the quarterly home price index could reignites inflation concerns and lead markets to price in another rate hike. However, forecasts are for a 2.0% rise which is slower than the 4.0% pace the month prior supporting a pause in monetary policy. The central bank’s quarterly statement will also posses market moving potential as it could confirm whether policy maker’s hold a dovish stance. The performance of service and trade balance will provide insights into the pace of growth with signs of a slowdown potentially weighing on the commodity dollar.