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Short EURAUD from 1.2327; Looking to Sell Euros

Short EURAUD from 1.2327; Looking to Sell Euros

2012-03-02 15:31:00
Christopher Vecchio, CFA, Senior Strategist
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I noted yesterday, "Well, the rally in the Euro leading up to the ECB's LTRO was rather...flat. The trepidation market participants showed in the days ahead was more intense than I expected. With that said I am now very bearish the Euro, except against the Swiss Franc. Here's why:

First, the Euro is facing its own downside pressure given the recessing Euro-zone region. German put in negative growth, and we've already seen the effects of austerity in the periphery: growth has been worse than expected. This trend will continue for the coming quarters. Secondly, the ECB has embarked on a substantial easing policy, one that will ultimately prove dilutive to the currency.

To this end, with extra Euros in the global financial system, institutions will then sell Euros and buy higher yielding currencies, such as the Australian and New Zealand Dollars, to capture “yield.” Going forward, I am extremely bearish the Euro versus the commodity currency block, barring any unforeseen tail-risks.

Now, while the ECB's measures are Euro dilutive, they're also risk-positive. At the end of the day, that means that the commodity currencies will rally against lower yielding assets, such as the Japanese Yen, U.S. Dollar, and especially the Swiss Franc (the Franc has held a +0.93 correlation with the Euro since September 6: higher Euro, higher France, and vice-versa). There are some very bullish patterns on the table now that suggest we could be heading towards new all-time highs in the Australian Dollar as well."

Selling Euros across the board has been fruitful today, with the common currency posting the largest declines across the majors. I maintain this bias through next week, ahead of the Greek swap deal. I will flip my bias if the CDS are triggered, as that could cause a major pullback in the commodity currencies (I would expected EURAUD to rally then). For now, I am short EURAUD from 1.2327, looking for a test of the all-time lows.

- AUDUSD: A Bull Flag has formed on the daily chart. The Flag Pole is off the January 9 low to the Feburary 8 high. The Flag is the descending channel consolidation from February 9 to February 29. Today, the pair is breaching the topside channel resistance. Although AUDUSD closed above 1.0760 yesterday, it has fallen back today. I'll be looking for a subsequent close above 1.0760 and then 1.0860 (above 2012 high and ascending trendline on October 2011 and former 2012 higher) to confirm this move higher. The measured target on the Bull Flag is 1.1165, above the all-time high set in July at 1.1079. It's important to note that Jamie Saettele has identified a 5-wave rally being completed on February 29, so we could be due for a pullback instead.

- EURAUD: The pair closed below its 50-DMA (1.2415) and 20-DMA (1.2339) yesterday. A break below the 61.8 fibo on the February low/high rally at 1.2317 confirmed that the move higher has been broken. With a daily close below the aforementioned three levels, a path has been cleared to the 2012 low at 1.2133. I'm short from 1.2327 with a Stop at 1.2430.

- EURCAD: Similar to the EURAUD, the EURCAD is closed below its 20-DMA (1.3195) and its 50-DMA (1.3149) yesterday. A break below the 61.8 fibo on the February low/high rally at 1.3104 confirmed that the move higher has been broken. Little stands in the way of a test of the 2012 low at 1.2871.

- EURCHF: I noted this week, "With the pair flirting with the 1.2100 handle, I'll be looking to buy on a dip below 1.2050, but closer 1.2030, the 2012 low. Reward/risk is high, given the monetary and political pressures on the Franc." I have initiated a small long EURCHF position at 1.2050, and I will add below 1.2030, as scheduled. There is a March 15 Swiss National Bank meeting that will be critical to this trade.

- EURUSD: I noted last Wednesday, "An hourly triangle is forming, with an explosive move higher or lower expected in the coming hours. A sustained move above 1.3320 could lead to a rally to 1.3600, and I will get heavily short at said level, given trendline confluence." Having clear the 100-DMA, the short-term pattern suggests a break to 1.3600, and I maintain my bias to short at this level. Should we break the 100-DMA and subsequently break the ascending channel that suggests support at 1.3200, I believe a test of 1.3000 and then the yearly low at 1.2626 are due shortly thereafter.

- USDCHF: EURUSD weakness should prompt USDCHF strength. I will be building into a long position on futher EURUSD weakness, especially ahead of the March 15 SNB meeting. I'll be buying on dips towards 0.8950. Topside resistance comes in at 0.9178, the 100-DMA.

Any other trade ideas and general macroeconomic musings can be found in the Real Time Newsfeed, or by following me on twitter @CVecchioFX

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