While Australia has been an outperformer of late on relatively stable economic fundamentals, we still see the commodity currency as highly exposed in the current market environment which does not favor currencies with higher interest rates.
Fundamental Catalyst – Despite the weaker than expected GDP data out from the Eurozone, we like the idea of looking to buy the cross at current levels on the assumption that any escalation in risk aversion and broad based global equity selling will more heavily weigh on the higher yielding currencies. While Australia has been an outperformer of late on relatively stable economic fundamentals, we still see the commodity currency as highly exposed in the current market environment which does not favor currencies with higher interest rates. The RBA’s monetary policy decisions have been questionable over the past few months, with the central bank holding at the previous meeting (and signaling a potential end to accommodation) before once again deciding to cut on Tuesday. Meanwhile, other central banks continue to cut rates at every chance they get in an effort to get ahead of the curve and offset the cooling within the respective economies. We contend that the RBAs “wait and see” mentality will ultimately weigh on the Aussie as market participants start to price in the need for additional rate cuts over the coming weeks.
Techs – Eur/Aud The cross continues to trade with a heavy tone since breaking down from a multi-day consolidation in late March. Setbacks however have now extended back to a very well supported are, with the daily chart showing the cross now trading at the bottom of a longer-term range. With daily studies showing oversold, scope exists for yet another bounce out from current levels back into the middle of a very familiar range that has defined trade since October 2008. The daily “Average True Range” (ATR) comes in at 310 pips and with the current high by 1.8955, today’s projected low comes in by the 1.8650 area. As such, we will look to establish a long position on dips towards 1.8650. Strategy: BUY @1.8655 FOR A 1.9450 OBJECTIVE, STOP @1.8455. Stops to be trailed to cost on a break back above 1.8800. If trade triggers and 1.8800 not broken, position to be closed out at NY close (5pm EDT) on Tuesday. Recommendation to be removed if not triggered by NY close on Tuesday.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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