The EUR/AUD traded a solid up trend from 1.1600 to 1.2550 – an impressive nine big figure climb a colleague described as “the gift that keeps on giving”. However, there’s a clear trend break on the charts, and combined with fundamentals that favour the AUD, traders could look to sell EUR/AUD.
Currency markets are challenging at the moment. Many traders favoured short USD positions into the QE3 announcement, on the view that additional USD in the system would lead to lower levels. Even though QE3 is now in play, the USD is higher. One explanation is that the event was so well flagged, and the implications so clear, that “the world” is short USD. There’s no-one left to sell, and the USD goes up.
Less well explored is the flipside of this equation. EUR/USD is the largest, most liquid market in the world. Many of those USD shorts are against long EUR positions. If the USD is strengthening, despite additional supply, it’s very possible that the EUR will weaken as longs are cut. And this time the fundamentals favour the move.
Growth in the Eurozone is tepid at best, and in my view, growth estimates will be revised downward several more times. Interest rates are likely to remain low for many years to come. And inflation is low. All of this points to a lower EUR.
The behaviour of the AUD has changed. Where in the past it moved with commodity markets, it has stayed high despite large commodity price falls. The high participation of overseas central banks in Australian bond markets (now more than 80% foreign held) suggests the rest of the world is seeing Australia as a safe haven. This leads to the perverse situation where the AUD strengthens if the growth outlook improves, and if it weakens.
With this is mind, have a look at this chart from the CMC Tracker platform:
The uptrend (blue line) is clearly broken. Further, there may be a head and shoulders forming (the purple line representing the “neck line”), a strong reversal signal.
There are many ways traders use this information. Intraday traders may use this overall directional view to inform their trading on shorter time frame charts – using the power of the downtrend to accept only the short signals of their trading plan.
However, for me, the opportunity is a “swing” trade, establishing a short position and riding it down. I’ll use a larger position than normal (actually two trades of standard size), so that I can trade around a core position. How far could it go?
EUR/AUD Daily, Fibonacci Retracement
I’ll watch closely around 1.2330, but my first target is just below 1.2200. My fundamental view is for a retracement to at least 1.1975. Here’s the set up I’m looking at:
Sell 1,000,000 EUR/AUD at current market, stop loss above 1.2455, target 1.1985
Sell 1,000,000 EUR/AUD at current market, stop loss above 1.2455, target 1.2198.
Assuming the target is hit, I’ll re-establish a short position on any bounce.