Following my post yesterday on trading the EUR/USD and the subsequent announcement on GDP growth for the eurozone, I thought it would be interesting to do have another look at the euro, this time as a trade idea for the EUR/AUD.

Fundamental

Eurozone Economy

The latest flash estimate for eurozone GDP growth confirmed the expected weakness.  The eurozone economy has now been contracting for six consecutive quarters – making it longer than the recession in 2008/09.  It remains highly likely that the economic weakness will persist and that 2013 will be another year of declining output for the eurozone economy.

For further information see the page on eurozone economic growth.

Australian Economy

The Australian economy has experienced a sharp loss of confidence in recent weeks.  Economic data has turned down and the Reserve Bank has reduced interest rates to try to shore things up.  The Australian GDP growth figures for Q1 2013 have not yet been released but it seems likely to be weaker than the previous quarter’s 0.6% q/q.

The Australian economy is strongly linked to the Chinese economy and recent data out of China has also showed signs of weakness.

For further information see the page on Australian economic growth.

Interest Rates

Interestingly both the ECB and RBA recently cut interest rates to record lows to try to stimulate their respective economies.  The ECB cut their minimum rate to 0.5% on 2 May and then on 7 May the RBA cut their own rate to 2.75%.  The Australian dollar has weakened the most since the announcements.

Future interest rates are currently implying that both currencies will see only gradual tightening over the next year and a half.  Australian dollar futures are currently anticipating slightly looser interest rates this year before tightening at a faster pace than the euro in 2014.

Conclusion

The recent strength of the EUR/AUD seems to be mostly based on Aussie dollar weakness rather than the euro strength.  Therefore I am more focused on what might happen to affect market’s perception of the Australian economy.

Although the Australian economy has definitely been weaker recently, this weakness should be put in the context of the strength that it has shown over the last few years.  The Australian economy grew by 2.9% in 2012.  By contrast eurozone GDP fell by 0.9% in 2012.  The flash estimate for eurozone GDP for Q1 2013 is -0.2%.  The Australian GDP figures are yet to be released.

Given the fundamental picture it seems likely that there will be a turnaround in the markets perception of the EUR/AUD, especially given the strength this pair has seen during April and May so far.  Therefore I will be looking for this pair to move back down into the range rather than continue to rise strongly.

Technical Picture

Looking at the weekly chart this pair is currently trading within a slow ascending channel.  The current price has hit some resistance at the 1.31 level.  The channel suggests that the long term direction is upwards but that the pair is likely to see significant moves to the downside within the ascending channel.

The daily chart shows how the price has had a strong run from the lows around 1.22 to trading above 1.31 yesterday.  Yesterday’s and today’s candle are interesting because they are almost mirror images.  The candles show that the price has hit some resistance and is struggling to go higher at the moment.  However, this does not mean that we have necessarily reached the top of the current upwards move.  Therefore I intend to enter this market short on a break below 1.2970, providing the price has not already broken above yesterday’s high at 1.3119.  I will be targeting a return to 1.27 with a stop-loss 20-30 pips above yesterday’s high.

If the market breaks above yesterday’s high I will reassess the situation before opening a trade.