Inflation and the collapse of the euro
The euro has been under pressure for some time and the AUDUSD is signaling that there is still more room for positions to run. This euro weakness is coming on the back of geopolitics proximity and monetary policy, in which both are unlikely to fundamentally change soon.
Due to the euro's a) liquidity and b) fx flow away from conflict and uncertainty, the euro is under pressure. Therefore, shorting the euro is a hedge against further escalation in Ukraine. Also, the markets appear to be dissonant with other central banks signaling that they will deal with inflation with rate hikes but look to the ECB who have until this week been reticent to change monetary policy beyond tapering the PEPP.
Recent geopolitical developments have caused markets to price in the ECB maintaining its very dovish policy for much longer. And in the anticipation of this week's ECB meeting, the market expects a dovish tone from the Governing Council to increase downside risks for the euro.
However, the situation is quite different on the other side of the world. Antipodean currencies remain well supported as investors flock to commodity currencies. As well as being geographically isolated from Europe and having very little exposure to Russian trade, the AUD has an export mix that benefits from the potential removal of Russian commodities from international markets. As a form of self-sanctioning or at the very least as protection from the US sanctions fallout, the shipping industry is already stopping the supply of Russian goods. Whenever there is an opportunity and an allocation of capital, there is a trade to be made. There is the possibility that Australia may lose out on some commodities exports to China if Russia turns to China and China takes advantage of this strong relationship. There may need to be an adjustment there by Australia and a shift to a broader market.
The EURAUD has tended to move inversely to the AUDUSD so we could potentially find more room to trade higher in the AUDUSD. But looking through the euro crosses, there is definitely some targets to the downside to looking for and I still believe the longer the Russia/Ukraine situation goes on the more flows out of the euro we’ll see.
82% of traders on the ActivTrader platform trading the EURAUD are looking for higher prices. So as a decent contrarian trade we should be looking for continued short opportunities until this cohort is stopped out or flipped to neutral.
The monthly chart points towards the 1.4310 level as being a good initial target for anyone currently short. Though when trend lines break in this manner there is a high probability trade all the way to the trend lines origin, which would open 1.2000 at least.
While I would like to be in a short right now and target the 1.2000, I am not, so I am looking for levels to wait for the price to return to. The speed at which the euro has collapsed means we could be in for a long wait but with both the RBA and the ECB in the economic calendar this week, it is a reasonable assumption that there will be profit-taking ahead of the data and speeches. Which could lead to some sort of dead cat bounce or bear market rally. If I see a rejection off either the market structure at 1.5260 or the imbalances at 1.5514 and 1.5707, I’ll happily chance a short position. Similarly, if we get to 1.4310 without testing any of the levels above, and I see a bullish reaction, I may take a speculative counter-trend position, but be very wary for the turn lower.