EUR/AUD is another cross rate which we believe has fully run its course and is now on the final leg of an intense downtrend. This cross now shows a monthly RSI that is severely oversold and well below 30. While a long position in the cross is certainly less attractive from a rate differential standpoint, the market is clearly at some major cyclical lows and shows enough upside potential to more than offset any fallout from the negative carry. Fundamentally, should risk appetite pick-up, we believe that most of the strength of the Australian economy is as priced in as possible. But in the Eurozone, there is much less optimism priced into the market, which theoretically opens the door for a faster appreciation on a relative basis in the euro. In contrast, should we continue to see a global macro economy that is seriously uncertain and fearful over the outlook for the global economy, we also believe there is tremendous upside potential for the cross, with the RBA then becoming much more uncomfortable with its tightening policy and most probably forced to reconsider just how fast rates were hiked over the past few months. Certainly a negative risk global environment supports the argument for a shift from higher yielding currencies to lower yielding ones, which effectively would translate into a higher cross rate. Remember, the Australian economy is extremely reliant on the success and growth of China and India and should there be any signs of weakness there, the Australian Dollar will be at risk for major depreciation.
We do not recommend any specific positions in these crosses at this point, but would instead just like to bring these markets to your attention in case any of you are looking for a low leverage longer-term play. These are certainly two of our favorite trades over the next 12 months.
Looking ahead to the North American economic calendar, US consumer prices (0.3% expected) are out at 12:30GMT, followed by University of Michigan confidence (70.0 expected) at 13:55GMT. US equity futures are pointing to a firmer open, while oil and gold are also well bid. Gold continues to extend gains to fresh record highs. Have a good weekend.
USD GRAPHIC REWIND