Euro rallies as commodity bloc misses out on USD weakness

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The Aussie dollar hasn’t done poorly in the past 24 hours. Indeed, after trading a 0.7646/83 range overnight it’s largely unchanged here at 0.7663 this morning.

The RBA minutes didn’t really throw any fresh light on the outlook. Sure, in this quiet time of year the fact that the bank said households posed a “significant risk” to the economic outlook has received plenty of coverage.

But, readers of this note will know that I have been writing about my concerns – and indeed the RBA’s own worries – on this front and its possible impact on the economic outlook. That’s why I say there was nothing fresh. But what is clear in the minutes with expectations that wages will stay low and that households still face a tough time even with employment strong is that the RBA sees itself on hold for some time.

But concerns about an on-hold RBA versus an actively tightening US Fed have – for the moment at least – been put to one side as the positives around global growth, metals and iron ore’s rally, and a generally strong leap in investor risk appetite have supported the Aussie dollar.

Heck, even the AUD-USD 2-year bond spread has risen back to eleven and a half points.

That’s all positive.

But for the moment AUDUSD remains trapped below the 200-day moving average with support in the 0.7625/30 region then 0.7605/15.

Today though I want to highlight the EURAUD chart after EURAUD rallied about half a percent overnight and after its recent respect of the uptrend line which dates back to July this year. It’s at 1.5450 this morning with overhead resistance from what I’d identified as a neckline on a H&S pattern coming in at 1.5540ish.

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That region – say 1.5520/40 is both the target and resistance.

Of course, the reality is that the move is being driven by the Euro’s strength against the US dollar while the Aussie is sidelined with the CAD and Kiwi. So, the key to where this goes might actually be if the Euro can, or can’t, break 1.1865/70. A break of that zone could easily see EURAUD test the overhead trendline support.

If that level continues to hold then a move back toward the 5-month trendline is in the offing. Should it break then EURAUD looks biased back toward 1.5770 – the recent high.

In other forex market developments, the lack of singular narrative continues in forex markets. But it’s clear that the single narrative which has dominated forex trade in the Euro this year remains in place. That is, traders want to believe in the Euro and discount the US dollar. The first hints of that came back at the beginning of this year when the BAML fund manager survey said long USD was the most crowded trade. It was a clear “tell” that fund managers didn’t believe in the Buck and its strength. So, when we saw US data collapse from April Euro bulls and dollar bears were back in play. As it stands now – and as I wrote yesterday – there are precious few catalysts to see this theme change as we head toward years end. So, it looks like my expectation Euro could trade lower is wrong.

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