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This idea takes into consideration both technicals and fundamentals and thus I feel this pair has the potential to see strong downside over the medium term.
Conditions in the forex market are horrible for short-term traders, with volatility (as measured by JP Morgan FX volatility index) at historic lows. Traders need to adapt to these conditions as they don’t look like abating anytime soon. It seems the best way to trade the low volatility in the forex market is to buy a high-yielding currency and fund the position using one with the easiest monetary policy stance and lowest yield – the carry trade.
I think once the dust settles the actions announced last week from the ECB will cap EUR upside, while the measures to expand excess liquidity in the eurozone should cause this pair to fall.
I also like selling EUR/CAD and there is a head and shoulders pattern that is visible on the daily chart, which targets a move 400 pips or so lower. However, from a momentum perspective I prefer to be long the AUD.
Looking at the technical, it’s worth highlighting that when this pair trends it does so with some vigour; the fact the PBOC is starting to ease more aggressively should help as well.
The pair continues to print lower lows and highs and to smooth this out using a 21-day moving average shows a clear developing trend.
We’ve also seen the pair close below strong horizontal support, with the September pivot giving way.
Both the MACD and stochastics highlight the weakness in the price and suggest that rallies should be capped.
This idea looks good to me as it takes advantage of the prevailing trend, clear divergence from both central banks and the current market conditions.