By: Christopher Lewis
The EUR/AUD is a pair that far too many retail traders neglect. The pair is often thought of as “exotic”, but the fact is neither one of these currencies are exactly strangers to most Forex traders. (I recently traded the ZAR/JPY pair – that’s an exotic, but not this one….) The pair will act much like the majors, although it does have a slightly larger spread than you might be used to. A lot of breakers trade it at about 6 pips spread typically.
The pair has been in a long-term downtrend, and recent broke down through the bottom of a 20 year consolidation box. Needless to say, this isn’t a common event by any stretch of the imagination. For those keeping score, this happened at roughly 1.29 about a month ago.
The pair will actually serve two purposes for the trader at the moment. In general, it is a “risk off” pair. In other words, it will rise when times are bad as the Euro is typically considered to be safer than the Aussie. However, this hasn’t been the case as much lately for obvious reasons. Also, it tends to fall with bad news out of Europe as the world runs from the Euro. It has kind of been a “Heads I win, tails you lose” type of market for those who are short. (Full disclosure, I have been for about three weeks.)
Pennant
In a show of support for the birthday of Australia, the pair fell to show Aussie strength again on Thursday. As I look at the charts, I see a pennant forming, and this shows just how negative the environment is for this pair currently. This is one of the reasons I have been able to hold onto this trade for a while.
The 1.25 level should be resistive at this point, and if the pennant gives way, the projected move measures 900 pips or so – a trade that can make your year. The target would be somewhere in the neighborhood of 1.13 or so. This may seem extreme, but the Aussie is absolutely crushing everything it touches right now. Because of this, I am staying short in this trade unless we close above 1.25, in which I will simply short weakness later. However, if we close below the bottom line of the pennant on the chart – I will be adding to my position size. Oh, and as a bonus: You actually get paid positive swap on this pair, and as the ECB cuts rates again in the near future – this will only increase.
