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EUR/AUD Channel Holds on Carry Trade Unwind

EUR/AUD Channel Holds on Carry Trade Unwind

2010-05-17 18:06:00
John Rivera, Currency Analyst









How stable is the EUR/AUD Range?
Levels to Watch:
-Range Top: 1.4300 (Trend, Psychological)
-Range Bottom: 1.3900 (Trend, Pivot)
The Australian dollar has come under as the carry trade has begun to unwind on the back of broader growth concerns. The debt crisis in Europe has remained markets that governments will need to make sharp cuts in spending in order to offset budget deficits that were incurred rescuing their economies from the credit crisis. The high yielder is seeing across the board weakness including against the beleaguered Euro. However, downside risks remain for the single currency which may lead to the continuation of the current downward trending channel.
• The EUR/AUD has been in a wider downward trending channel for the past year. Over the past few months it has started to narrow which is the section that we are focusing our set-up on.
Suggested Strategy
• Short: Place an entry at 1.4300 just above the upper bound bound
• Stop: Set the stop to 1.4400-100 pips in risk.
• Target: The first target is 1.4100

Trading Tip – When we set out to write this report we were looking at taking a long position to take advantage of the bounce from support at the lower bound. However, accelerating gains have led us to miss the move and rather than chase it, we will look for a set up to take advantage of a continuation of the current channel by looking for a failed test of resistance for a short portion. However, we can’t discount the fact that the pair does remain in a broader longer-term channel which could put resistance at 1.4830, leaving considerable upside to the current bullish move. We are favoring the shorter-term formation considering the prevailing bearish Euro sentiment which could limit bullish conviction. A move above our limit could open the door for a test of the longer-term upper bound ands would change our bias.  

Event Risk for Europe & Australia
Europe – The German Zew reading will deserve attention as sentiment has been firm despite the debt issues and signs that optimism is fading could significantly lower growth forecasts and stall the current trend in hiring. The consumer price index for the E.Z. will also cross the wires and may lose some of its market moving potential given the broader concerns, but with the ECB’s sole mandate of price stability an accelerating pace of inflation may be a supporting factor for the single currency.  
Australia – The RBA minutes could present significant event risk for the Australian dollar as some of its recent slide can be attributed to lower interest rate expectations. Statements following the central bank’s latest rate hike which pushed interest rates to 4.50% hinted that the current tightening cycle could be paused. The issues in Europe have given most policy makers a reason to remain cautious, but the RBA views Asian growth as a cushion and have placed their focus on inflation to dictate future actions. Therefore, the upcoming wage cost index report and consumer inflation expectation reports could have an imp[act on price action as they are two of the main drivers of prices.

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