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EUR/AUD looks good for a move lower in the coming week and I feel shorts in pair look compelling at present.
Technically the pair has closed below the 38.2% retracement of the November to January rally at 1.5153, and a subsequent close below the recent double bottom at 1.5023 would suggest a deeper move lower. On the hourly chart however, the pair looks fairly oversold; hence I am keen to sell any rallies that may eventuate.
In terms of the fundamental drivers, there are a number of key reasons behind the call; these include strong two-way trade with China, recent data in Japan that shows three consecutive months where Japanese funds have been strong buyers of Australian government bonds and of course the RBA has switched to a more neutral bias.
The key for me comes from the potential for divergence at a central bank level and I feel this will be the kicker for greater downside in the pair. There is a fair bit of data that will drive the pair throughout this month, notably with this week’s Australian retail sales and employment data; however in the latter stages of the month we get Australian private capital expenditure figures (February 27), while in Europe (on February 24) we get revisions to the inflation print. This inflation read will be key as a drop from the prior reading of 0.7% should see EUR fall.
The key risk to this trade stems from a lower trend in the iron ore price of late, while a number of the inputs into the recent Australian CPI print were boosted by special factors, which helped a number of tradable inputs. Many expect these to fall, thus we could see economists calling for a slightly lower CPI print in Australia.