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Forex Analysis: EUR/AUD Trading into a Near-term Top

Forex Analysis: EUR/AUD Trading into a Near-term Top

2012-12-19 16:20:00
Christopher Vecchio, CFA, Senior Strategist
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The EURAUD was the epitome of the “risk” trade throughout 2011: with no safe havens represented in this pair, flows were largely dictated by demand for low yielding or high yielding currencies. Accordingly, during times of panic, the EURAUD rallied; and during times of confidence, the EURAUD fell. We note this occurrence throughout the fall of 2011, where the EURAUD often set tops or bottoms on or within a day or two of the S&P 500.

This year has proven different. Even during times of market distress, most notably from mid-April through early-August, the EURAUD fell, in no small part thanks to the fact that the Euro was the culprit for much of the market’s malaise. But ever since European Central Bank President Mario Draghi said he would do “whatever it takes” to save the Euro on July 24, the Euro has acted like the riskier currency (typically the Australian Dollar is, given its high yield relative to the other majors).

Fast forward to today, and as the European debt crisis settles momentarily for the holiday break, investors across the globe are liquidating their short EURxxx positions – that’s to say that the EURAUD, EURGBP, EURJPY, EURUSD, what have you – have all rallied quite substantially. The EURAUD represents our favorite opportunity to look for a reversal lower, given the litany of issues facing the British Pound (horribly weak economy), the Japanese Yen (new ultra dovish prime minister), and the US Dollar (Fed’s QE3, agency MBS purchases and Treasury buying at $85B/month).

LEVELS TO WATCH

Resistance: 1.2720 (descending trendline off of May October 2012 highs), 1.2820/25 (October 2012 high)

Support: 1.2585 (monthly R1), 1.2535, 1.2400 (ascending trendline off of August and November 2012 lows).

EURAUD 4-hour Chart: December 19, 2012

Forex_Analysis_EURAUD_Trading_into_a_Near-term_Top_fx_news_currency_trading_technical_analysis_body_Picture_1.png, Forex Analysis: EUR/AUD Trading into a Near-term Top

Charts Created using Marketscope – Prepared by Christopher Vecchio

STRATEGY – SHORT EURAUD

Entry:1.2720

Stop: 1.2830 (-110-pips)

Target 1 (Reward/Risk Ratio): 1.2585 (+135-pips, 1.23)

Target 2: 1.2535 (+185-pips, 1.68)

Target 3: 1.2400 (+320-pips, 2.91)

Timeframe: 1- to 2-weeks

EVENT RISK – December 20 through December 28

Forex_Analysis_EURAUD_Trading_into_a_Near-term_Top_fx_news_currency_trading_technical_analysis_body_Picture_6.png, Forex Analysis: EUR/AUD Trading into a Near-term Top

--- Written by Christopher Vecchio, Currency Analyst

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

Follow him on Twitter at @CVecchioFX

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