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The euro continues to have wind at its back, as the currency is increasingly being viewed by the market as a possible alternative to dollar's reserve currency status. Friday's poor TICS data which printed only $26 Billion versus $75 Billion expected, produced the second monthly disappointment in a row and raised fresh questions about US's ability to finance its massive current account deficits. Should the market begin to fear that foreign capital is no longer being allocated into dollars, the flow towards the euro will only accelerate.

On the other hand, with the RBA rate hike out of the way, the Aussie continues to trade strictly on carry trade dynamics. With equity markets looking wobbly, any further bout of risk aversion is likely to push the unit lower. While the euro is also in effect a carry currency, its status as the reserve alternative resulted in much more muted risk aversion corrections than the other high yielders. Therefore, even if the dollar should strengthen next week, we believe the euro will outperform the Aussie providing our fundamental foundation for the trade.

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