Clear EURAUD Congestion Threatened By Next Week’s Rate Decisions

Why Would EURAUD Hold a Range?   ·         Levels to Watch: -Range Top:       2.0065 (Pivot, Fib) -Range Bottom: 1.9525 (Pivot, Fibs)   ·         Fundamentals will play a significant roll in the future of EURAUD. On the one hand, we have the Euro Zone (which at one point was expected to become the world’s new reserve currency) struggling under a recession and financial crunch that is region wide but approached with national solutions. For Australia, a domestic slump in growth is adding momentum to the fading export potential. Perhaps rates will be the defining fundamental driver.     ·         Though it is somewhat messy, congestion has been the rule of thumb for EURAUD for nearly three weeks. There was a significant, bullish drive that initially brought this pair to its current congestion, but the momentum in that bias has faded. Now, we will watch the more defined pivot at 2.0065 to judge whether it can hold out to any spikes in volatility.   Suggested Strategy   ·         Short: Half-sized entry orders will be set at 2.0020 to account for a modest slope to highs.   ·         Stop: An initial stop at 2.0160 is set with a modest buffer over our obvious resistance. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (140) at 1.9880. A second target doubles that at 1.9740.

Trading Tip – Where many of the currency market’s most liquid pairs are riding out short-term bursts in momentum or are otherwise positioned for potential breakouts; EURAUD has actually found itself in a very stable band of congestion. For the past three weeks, this range has proven itself immune to dramatic volatility behind other Australian dollar and euro crosses. Is this a balancing act between offsetting event risk or does is this pair exempt from such fundamental considerations? It is hard to tell. Regardless, next week’s scheduled event risk should be avoided so as not to take the risk that it is happenstance. Interest rate decisions from both the RBA and ECB offer enough uncertainty and accessibility to general risk trends that a breakout could be accomplished through a surprise outcome from either or both. Our strategy is somewhat risky considering the blatantly obvious level of resistance we are working with. A time stop is particularly important with this pair. We will cancel all open orders before the weekend and we will either tighten stops or close a profitable position before the central bank activity starts.  

Event Risk Euro Zone And Australia

Euro Zone – While the economic docket thins out somewhat for the euro (a significant amount of German data has been released over the past two weeks), those indicators on the calendar have real market-moving potential. Topping the list is the European Central Bank’s rate decision scheduled for Thursday. The policy authority has steadily lowered its benchmark lending rate for a number of months and the market has become conditioned to expect the group to maintain their pace towards the zero interest rate policy that the world seems to be pursuing. However, bank President Jean Claude Trichet has disturbed the market’s comfortable sense of certainty when after the last policy meeting he suggested that the next important meeting wasn’t until March. From the usually transparent policy maker, this is taken as a clear sign as a pause in February. Other than scheduled event risk, the euro may also find volatility from the euro’s general economic outlook. With debt downgrades, disparity in member economy recessions and isolated bailout efforts, serious doubt is growing over the health of the world’s second most liquid currency.

Australia – Risk trends and unique event risk are equally significant threats to the Australian dollar over the coming week. General sentiment across the markets is passing through an ominous period of calm with many assets sitting on the edge of bearish trend extremes. Not often are the markets so calm for long; and certainly not when on the cusp of a major trend change. However, this is an indefinable risk to price action. We can’t point to a time when the market may finally make its break. On the other hand, the event risk on the economic calendar gives us significant hurdles that we can prepare for ahead of time. There are a few top tier market movers, but the real risk is in the RBA rate decision. After the RBNZ’s rate cut yesterday, the Australian benchmark has taken top spot for the majors. However, the policy group is riding off an aggressive regime of cuts; and speculation that they could reach zero is growing.

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.