By: Christopher Lewis
EUR/AUD is an interesting cross at the moment. As many of you know, the Euro is in big trouble as the problems in the EU and its debt markets have the world on edge. In this environment it makes sense for the Euro to slide against most other currencies, however it isn’t often thought of against the Aussie. The fact is that most traders have been paying attention to the EUR/USD pair while many of the EUR/XXX pairs have been falling apart. (If you are wondering, the Euro has fallen against ALL of the commodity currencies as an example.)
While the world worried about Italian bond auctions, the EUR/AUD pair quietly broke through the bottom of a 20 year consolidation range just below the 1.29 mark. This move was barely a blip on the radar of most traders, and as a result hasn’t been reported in the media much. However, professional traders have no qualms about trading these more “exotic” pairs as they offer opportunities like this quite often. (EUR and AUD are both major currencies, so it isn’t THAT exotic.)
Recently, we saw the 1.25 area act as support in this pair, and that makes complete sense as it is a “large round number”. The pair seems to be decoupling from the usual Aussie correlation to risk, as the Aussie is now considered a safer currency than the Euro, and even though risk is often thought of as being associated with owning the Aussie, the fact that a lot of hard commodities are being bid up lately shows that there is a general distrust of paper assets and fiat currencies. Because of this, traders understand that the Aussie is greatly influenced by this trade. Also, the Australian economy is much stronger than the EU economy, and the swap rate is positive – something that matters in a low-yield bond rate environment.
Like a Knife through Hot Butter
The chart clearly shows that the Friday session saw an acceleration of downward momentum. The large red candle saw an attempt to rally, but a reversal just below the 1.25 level. This pattern on the chart is a bit oversold, but certainly suggests that we are going to see lower prices. Obviously, selling is the only way to trade this pair. If the Euro falls apart due to the late Friday downgrades, or technical slippage in the EUR/USD pair – this one will more than likely fall off the map.
.jpg "EUR/AUD Daily 1/16/12")
Forex is about triangulating the pairs are times. The Dollar is strong, the Euro is weak. However, the Aussie is showing strength against the Dollar. In others words – it is extremely strong. With the Euro being one of the worst performing currencies out there, it makes sense that the EUR/AUD should fall.
I am already short of this pair, and will continue to add to my position on rallies as they should all be sold as long as we stay under 1.25 or so.