Chart of the Day EURAUD

EURAUD Potential Reversal Zone - Probable Price Path

EUR: August retail sales in the Eurozone increased by 4.4% month-on-month, reversing the 1.8% decline in August, and better than market expectations of 2.5% growth. Bloomberg reported that the Italian government predicts that under the worst-case scenario this year, the Italian economy may shrink by 10.5% and grow only 1.8% next year. The Italian government hopes to reduce the debt ratio to about 150% of GDP by 2023. Markets remain constructive on the EUR in the wake of the EU recovery fund introduction, which should help minimise the break-up tail risks in the Eurozone and pave the way for the creation of a vast pool of AAA-rated assets that could attract flows from European investors returning home as well as foreign investors looking to diversify away from the USD in the coming months. Note that a growing divergence between the dovish Fed and the somewhat more neutral ECB could lead to renewed steepening of the Box spread between the slope of the EGB and the UST yield curves. This coupled with further tightening of the BTP-Bund yield spread should continue to boost EUR.

AUD: As expected Australian monetary policy was left unchanged at today’s central bank meeting. Afterward the RBA said that policy will remain “highly” accommodative as long as required and additional easing was being considered. The RBA held its cash rate at a record low on Tuesday but hinted at further monetary easing to cope with the coronavirus. The economy is suffering its worst contraction since the Great Depression. Australia pledged billions in tax cuts and measures to boost jobs on Tuesday in a budget that tips the country into its deepest deficit on record. Australia's response to Covid-19 has been exceptional among G10 countries and this is helping the AUD bounce back from the pandemic. China’s fast recovery from the virus and the US’s poor handling of Covid-19 has added to the AUD’s outperformance. Australia’s exposure to the relatively stronger economic recoveries from Covid-19 in Asia will continue to support the AUD in 2021. A high level of domestic household debt is a risk for the AUD when fiscal support for the economy is wound back and loan repayment holidays end.US-China trade tensions are also a downside risk.

From a technical and trading perspective, the EURAUD has found support in the middle of its established trading range 1.66/1.61, with momentum and cycle studies turning bullish, price currently trade above its monthly,weekly and daily volume weighted average prices, as such bullish exposure should be rewarded on a closing breach of 1.65, bulls will be looking for a breach of range resistance at 166 setting up a measured move objective at 1.6789. A move back through 1.6350 would negate the near term bullish thesis opening another test of range support.

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