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EUR/AUD Trend Channel Provides Trading Opportunity

EUR/AUD Trend Channel Provides Trading Opportunity

2010-02-24 21:08:00
John Rivera, Currency Analyst
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How stable is the EUR/AUD Range?
Levels to Watch:
-Range Top:       1.5740 (Channel, Range)
-Range Bottom: 1.7300 (Pivot, Range)

•The Australian dollar and Euro hold high correlations with risk trends leaving price direction to a direct comparison of economic fortunes. The higher yielding Aussie has seen it consistently gain ground against the single currency. Brief bots of carry trade unwinds has helped generate periods of Euro support which could be the case again if broader pessimism grows.
•The pair is currently in a ten month declining trend channel with established lower and upper bounds. The recent failed test of support makes a bullish case for the pair. Additionally, psychological support at 1.500 could prove formidable, especially considering that a break below would set a new ten year low.

Suggested Strategy
Long: Place an entry at 1.5300-just above the 2/17 high to validate the reversal in sentiment.
Stop: Set the stop to 1.5200 which is the most comfortable level of risk given our bearish Euro outlook.
Target: The first target is 1.5456-2/12 high and 1.5 times risk, followed by 1.5500-50.0% Fibo of 1.5955-1.5046.

 

Trading Tip – The prospect of the U.S. keeping interest rates low for the foreseeable future has reignited risk appetite on the day which has helped the Australian dollar erase some of its earlier losses. The broader theme still favors continued risk aversion and an unwinding of the carry trade which could see Australian dollar losses accelerate. Greece’s budget deficit and credit rating issues have dragged the Euro lower and could continue to plaque the single currency without action from European leaders. Today the S&P maintained the country’s BBB+ long-term and A-2 short term sovereign credit ratings but warned that a cut is possible within a month. This could force an immediate plan of action to provide aide to the struggling Euro-Zone member to avoid a collapse in the Euro. Any solution deemed more than a stop gap measure could propel the EUR/AUD higher validating our trade. However, a flawed plan may generate limited support as markets look beyond its short-term benefits and focus on the potential long-term implications. The possibility of Greece’s ills becoming a contagion has been priced into the market and any downside momentum could be limited. Another failed attempt at breaking below psychological support at 1.500 could provide a better entry opportunity.

Event Risk for Europe and Australia

Europe – German unemployment is expected to have risen by 16,000 in January and could be evidence that dissipating government stimulus is beginning to slow growth. The most significant release on the week will be January’s consumer price report. Early forecasts are for a rise to 1.0% from 0.9%, which should be a negative for Euro bulls. The ECB is steadfast in its conviction to remain on hold unless inflation threatens their 2.0% target. The economic confidence report has taken on more meaning following the disappointing German IFO, as increasing pessimism could lead to businesses and consumers retrenching.

Australia – The fundamental calendar may have little impact on Aussie sentiment if we see a shift in broader risk trends, so traders should take that into consideration when determining the potential impact from upcoming event risk. Inflation data holds the greatest potential for creating volatility as rising prices would justify further tightening from the RBA and increase the high yielder’s spread over its counter parts which remain stuck at record low levels. Rising wages is a primary source for broader inflation, making the fourth quarter report a significant release. The Conference Board Leading index for December will provide a gauge into the prospects of the economy over the next six months. An improvement from November’s decline of 0.3% will only add to the strong growth outlook for the antipode nation.
 

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