Market players have been pretty positive on risk in recent weeks thanks to economies reopening and the coronavirus pandemic slowing down a bit in many parts of the world.
This has led to a nice rally in the Aussie dollar, which I look to play on a pullback from its rally. And I’ll do so against the euro, which could see fireworks soon with the latest monetary policy decision from the European Central Bank coming soon.
EUR/AUD Downtrend Play
As mentioned above, the Australian dollar has been on a tear higher since mid-May, rallying on both positive global risk sentiment (economies ending lockdown, coronvirus vaccine/therapeutic developments) and on improving Australian sentiment being one of the few countries to handle the pandemic very, very well (only 7K cases, 91.85% recovery rate).
This has lead to somewhat better-than-expected economic updates (Australia reported -0.3% GDP contraction in Q1 vs. projected -0.4% figure), which also leads to a very low probability at this point that we’ll see further stimulus from the Reserve Bank of Australia.
I don’t think this sentiment will change for the Aussie over the next few weeks, so I’d like to play it to the long side, and I’d like to do so against the euro, which will likely see some fireworks tomorrow during/after the latest European Central Bank’s latest monetary policy statement.
Expectations are for a 500-750 billion EUR increase in the Pandemic Emergency Purchase Program (PEPP), with close attention being paid to how long this program will last.
If we see bigger supportive actions taken than expected, the euro could take a hit, but I think the euro may also fall on the event in a “buy-the-rumor, sell-the-news” scenario. The news of a potentially big PEPP package was announced last week, sparking a bullish euro reaction, so traders may take down some euro longs on this event.
Whatever we do get from the ECB this week, I think the current themes aren’t likely to be changed, and that if we see a bounce during/after the ECB event, that will be an opportunity to play the trend in EUR/AUD lower at a better price.
So with that, I’m looking for a bounce higher before entering a short position on EUR/AUD. My stop will be around one weekly ATR from my first set of short orders, and my target will be the 2019 lows for a solid potential return-on-risk. Here’s what I’m doing:
Short half position EUR/AUD at 1.6300, max stop at 1.6710 with 0.50% risk, initial target at 1.5750
Short half position EUR/AUD at 1.6495, max stop at 1.6710 with 0.50% risk, initial target at 1.5750
I’m only risking 1.00% of my account on this trade if both orders are triggered, and I’ve got a potential return-on-risk of around 2.41:1.
Based on what happens in the next few days, I may change this plan if it makes to do so, but if nothing’s changed and my orders aren’t triggered by the Friday close, I’ll close my orders and re-look at the pair over the weekend.
Be sure to manage your risk and avoid overexposure.
What do you guys think? Are you watching EUR/AUD for a potential swing position as well? Let me know in the comments section below!
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