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Long EUR/AUD Entered at 1.3640; Targets 1.4030

By , Currency Analyst
21 November 2011 21:27 GMT

The Australian Dollar and the Euro have been among the most volatile currencies the past few weeks when traded against the U.S. Dollar. From October 4 to October 28, after both of these currencies established multi-month lows against the U.S. Dollar, they snapped back towards highs unseen since July. The Euro-zone summit proved to be a bust, as expected, and since the start of November, the EUR/AUD pair has moved higher. This has come hand in hand with both the AUD/USD and EUR/USD selling off, but the AUD/USD weakening more. This would suggest that risk-appetite trends are weakening: demand for a high yielding currency (the Aussie) is softening rapidly and demand for a fundamentally-flawed currency (the Euro) is fading as well.

Now that the pair has moved above 1.3640, just above the former moving average confluence zone that was in place in mid-October, a long entry has been triggered, with a termination target at the Range Top of 1.4030.

Levels to Watch:

- October High:1.4086 (0.0 Fibo)

- Range Top:1.4030

- Range Bottom:1.3050

- September Low:1.2988 (100.0 Fibo)

Updated EUR/AUD Daily Chart: June 2011 to Present

Long_EURAUD_Entered_at_13640_Targets_14030_body_Picture_10.png, Long EUR/AUD Entered at 1.3640; Targets 1.4030

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Original EUR/AUD Daily Chart: June 2011 to Present

Long_EURAUD_Entered_at_13640_Targets_14030_body_Picture_1.png, Long EUR/AUD Entered at 1.3640; Targets 1.4030

Charts created using Strategy Trader– Prepared by Christopher Vecchio

I originally wrote back on October 20, “Considering the shorter-term ascending channel’s Range Bottom has served as a pivot area, the EUR/AUD should either bounce higher back towards the 1.4000 level or follow through with a major break below back towards the 1.3000 area. My fundamental bias is towards risk-aversion; therefore on a carry trade basis, Euro strength is favored against the Aussie due to interest rate differentials.” The thrust lower failed, with the EUR/AUD failing to breach the 1.3100 level. As such, our bias to the upside has prevailed, and we continue to look higher now that the trade has been entered.

Updated EUR/AUD 6-hour Chart: August 12 to Present

Long_EURAUD_Entered_at_13640_Targets_14030_body_Picture_13.png, Long EUR/AUD Entered at 1.3640; Targets 1.4030

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Original EUR/AUD 6-hour Chart: September 1 to Present

Long_EURAUD_Entered_at_13640_Targets_14030_body_Picture_19.png, Long EUR/AUD Entered at 1.3640; Targets 1.4030

Charts created using Strategy Trader– Prepared by Christopher Vecchio

On October 20, I wrote “The chart above (6-hour timeframe) shows the Fibonacci retracement levels for the EUR/AUD, and what is expected out of the EUR/AUD in the coming weeks, with our bias in favor of Euro strength and Australian Dollar weakness. The pair currently trades between its 50.0 and 61.8 Fibonacci retracement levels, from 1.3537 to 1.3407, respectively, from the September 12 low at 1.2988 to the October 4 high at 1.4086.” These levels continue to hold significance.

Suggested Strategy

  • ENTERED: Long at 1.3640 [above former Moving Average Confluence Zone]
  • Stop: 1.3407 [61.8 Fibo] (233-pips)
  • Target 1 (Reward/Risk Ratio): 1.3775 [Last Week’s High] (135/233, 0.58)
  • Target 2: 1.3827 [23.6 Fibo] (187/233, 0.80)
  • Target 3: 1.4030 [Range Top] (390/233, 1.67)
  • Timeframe: 2-weeks

Trading Tip The fundamentals are firmly in control of the EUR/AUD trade, as market liquidity conditions become increasingly thin and there is a demand for safer assets – the Euro is the “safer” asset, on an interest rate differential basis, relative to the Australian Dollar. Still, the technicals must be respected. This trade was entered earlier today, although at a seemingly inopportune time: the 6-hour RSI is overbought while the daily RSI is threatening the overbought level, at 66.7. Likewise, the daily Slow Stochastic oscillator is close to peaking, with the %K greater than the %D, at 90.9 and 81.7, respectively. Nevertheless, with the MACD Histogram beginning to diverge in a bullish manner, and the fundamentals pointing towards further gains, this is a trade that should have been taken. Although there might be a pullback in the near-term, the 1.4030 target looks attainable in the next two weeks.

Event Risk for the Euro-zone and Australia

The coming few days are relatively quiet on the Australian side of things, but there are numerous pieces of data due for the Euro-zone that could aid this trade. Although the data is forecasted to soften substantially, contracting Euro-zone manufacturing figures boost demand for safety and thus lower yields; even though this data should be Euro-bearish, the EUR/AUD looks to gain.

Euro-zone – There are various releases over the coming three days that will show Euro-zone production is weakening, thus leading to concerns of a steepening crisis. Tomorrow, confidence data is due, and is expected to show a further deterioration. On Wednesday, both German and broad Euro-zone purchasing manager indexes are due, all forecasted to show signs of a more acute contraction in activities. The most important release of the week is the German GDP revision on Thursday; although no change is expected, a softer figure will stir panic on an illiquid day due to the Federal holiday in the United States.

Australia – The combination of the Euro-zone debt crisis and the United States Congressional impasse are the two main events moving the market these days, and these are trends that are unlikely to leave the foreground. In the near-term, a failure by the Joint Select Committee to find sustainable budget cuts that reduce the United States’ deficit will create demand for the U.S. Dollar, as a debt downgrade would be expected to come across the wires in the next week or so. On the other hand, as the Euro-zone debt crisis continues to weigh, higher yielding currencies, such as the Australian Dollar, are expected to face pressure as investors unwind speculative positions and raise capital.

Data for November 20 to November 25

Data for November 20 to November 25

Date

Euro-zone Economic Data

Date

Australia Economic Data

Nov 22

EZ Consumer Confidence (NOV A)

Nov 22

Conference Board Leading Index (SEP)

Nov 23

German PMI Manufacturing (NOV A)

Nov 23

EZ PMI Manufacturing (NOV A)

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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21 November 2011 21:27 GMT