EURAUD - In Search Of Fundamental Ideas

Includes: FXA, FXE
by: Dmitry Lifatov


Both the EU and Australian economies are now in a good shape, with all major macroeconomic indicators improving in both countries;

The Chinese economic slowdown in Q2 2017 caused a depreciation of the Australian dollar, but now we can expect a shift in traders' attention toward the possible EU economic problems;

The start of the QE tapering in the euro area can cause a strong upward move of the European currency, moving EURAUD away from the sideways trade.

The European economy is currently performing exceptionally well, with all leading macroeconomic indicators - Manufacturing PMI (57.4 in August 2017), Services PMI (54.9 in August 2017), business confidence (1.05 in July 2017) and consumer confidence (-1.5 in August 2017) - trending higher. Coincident indicators (CPI, core CPI, PPI, unemployment rate, GDP growth) also confirm a robust and self-sustaining growth in the euro area.

The Australian economy is also in a good shape, at least based on the endogenous macroeconomic analysis, which was conducted in my previous article "AUDUSD - Breaking a 3-Year Consolidation Area". Thus, we can conclude that neither euro nor the Aussie has a decisive advantage in this pair, based on purely internal economic factors.

But starting from March 2017 euro has managed to rise by more than 10% versus the Australian currency. This growth was possible due to a slowdown in the Chinese economy. Australia heavily depends upon the demand from China on raw materials, primarily on iron ore and coal. A string of softer macroeconomic data from China in Q2 2017 caused some doubts regarding the diminishing export revenues of the Australian companies. Also, Australia is not typically considered as one of the world's major economic powerhouses, unlike the euro area and China. Therefore, the attention of traders was attracted to the improving EU macroeconomic indicators and softer Chinese data, which were automatically translated into the weaker outlook for the Australian dollar prospects, despite a robust endo' growth in the Australian economy.

This was the primary reason for euro advances versus the Aussie. But now this factor - weaker Chinese growth - is losing its importance and significance with a new round of macro statistics coming out of China pointing to the increasingly optimistic forecasts for the future of the Chinese economy. And we expect a gradual shift in traders' attention toward other fundamental ideas, which might cause an even further growth of EURAUD or reverse a previous ascending trend.

Both for the euro area and the Australian economy, the rising national currencies is a headache, since they hurt exports. But one factor, which can cause a decline in EURAUD exchange rate in Q4 2017, can be an adverse impact from the U.S. and Chinese Q2 2017 economic problems on the European economy. This impact can materialize in Q4 2017, but most experts are certain that in a globalized economic environment the euro area will undoubtedly face some economic problems sooner or later, which can halt the climb of the European currency. For the Australian economy, this is not the case, since all adverse effects from the Chinese slowdown in Q2 2017 were already priced in by traders and investors. However, another fundamental theme in the currency market, namely a possible start of the European QE tapering process, can offset the impact of a possible slowdown in the European economy. If the ECB in the near future gives some hints on a coming QE tapering, this will cancel our expectations for a lower EURAUD.

Technically, on the chart, we see a rather ugly price action over the recent four years, which makes it difficult to enter the market. Actually, EURAUD for the most part of this time period is simply ranging sideways, and we don't expect significant volatility in the coming months as well. The only factors, which can cause a strong bias in favor of one or another currency, are a possible EU economic slowdown in Q4 2017 and a start of QE tapering by the ECB. So, we should focus our attention predominantly on the European economy, the health of which will determine the future EURAUD exchange rate dynamics.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.