Going with another euro pair for this week’s FX idea, this time on EUR/AUD with major catalysts ahead for both currencies!
Rising Trendline Retest on EUR/AUD?
My bias on euro remains the same as when I went long euros in my last EUR/NZD long trade because of the positive fundamentals and on speculation that we’ll get quantitative tightening because of the good economic data. Now we do have a major event just ahead with the European Central Bank’s monetary policy meeting on Thursday, and while there is an argument for a dovish surprise from Draghi & company (possibility to slow down euro’s strength), I think the data is good enough to keep tightening as a strong possibility despite whatever jawboning the ECB may do.
But this week, I’m going with this bias against the Australian dollar, mostly because we do have a catalyst for volatility in the form of the CPI data. It is projected to come in better than the previous read (2.0% y/y forecast vs. 1.9% y/y previous), but even at 2.0% y/y, that’s still a relatively low read compared to its average y/y rate of around 2.5% going back ten years.
Overall, Australia is low on my fundamental ranking vs. the other majors because of inflation conditions, as well as the slowing rate of job growth and their need to cool the housing market. All put together, I don’t see the Reserve Bank of Australia tightening monetary policy soon, and it seems the big boy traders see it the same way as bullish positioning in the currency futures markets declined for the Australian dollar last week.
At the end of the day, this is a monetary policy divergence play, as well as a trending play with EUR/AUD, which has been in rally mode almost all of 2017. In the chart above, we can see in the past three months the pair has a pattern of steadily rising lows, and that’s where I’d like to go long, around the convergence between the rising lows and the major psychological level of 1.5000. Even with the market currently trading around 1.5125, I think it’s possible for a retest if we see a positive Australian CPI number in several hours, or even on a pullback during/after the ECB monetary policy statement.
My stop will be one weekly ATR which should give the trade plenty of breathing room, and my initial target will be the recent swing highs we saw at the beginning of October. Here’s what I’m doing:
Long half position EUR/AUD at 1.5000, max stop loss at 1.4725, initial target at 1.5275 for an initial potential 1:1 return-on-risk
I’ll be risking only 0.5% of my account on this position and as usual, I’ll look to make adjustments if my first target is reached, which would likely to be adding to my position/roll stop up to max out the trade if the monetary policy bias doesn’t really change. And if the ECB does come out very dovish in their statement, I’ll look to close the orders/live trade quickly to limit max loss.
As always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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