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EUR/AUD: Likely To Fall Despite Recent Upside

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Hedge Insider


  • EUR/AUD has spiked in a largely mechanical manner, as global markets price in greater risk.
  • U.S. equities have fallen, and the negative correlation between risk assets (including equities) and the euro has strengthened.
  • This is likely owing to the fact that the euro is cheap to borrow and is therefore used as a funding currency.
  • When speculative euro-funded trades are unwound, the euro can spike in the short term. Meanwhile, the ongoing threat of the coronavirus has placed special pressure on commodity currencies like AUD.
  • However, the extent of the recent upside is, in this author's view, extreme. A change in sentiment is likely to occur, which the bond market already appears to be pricing in. With AUD bearishness likely to soften, and EUR bullishness likely to dissipate (at least in the short run), EUR/AUD is now exposed to the short-term downside.

The EUR/AUD currency pair, which expresses the value of the euro in terms of the Australian dollar, has surprisingly spiked recently, on the back of risks pertaining to the coronavirus known as SARS-CoV-2 (a virus which causes the disease now referred to as COVID-19 in humans).

The daily candlestick chart below illustrates the recent spike, which has seen EUR/AUD prices escape their medium-term trading range.

EUR/AUD Breakout to Upside(Chart created by the author using TradingView. The same applies to all subsequent candlestick charts presented hereafter.)

The chart above highlights the levels of 1.5920 and 1.6610, which I drew attention to in my previous article covering EUR/AUD; an article in which I indicated the potential for short-term upside, but long-term downside.

This spike in the euro has been witnessed in almost all EUR FX crosses, following a period of protracted downside into 2020 (see daily candlestick chart below for EUR/USD).

EUR/USD 2020 Price ActionAn exception to the euro's recent ascent applies to EUR/JPY, a pair which has in fact fallen, consistent with this author's bearish view of the euro versus the Japanese yen. This is telling, as in spite of recent euro strength against currencies like as the U.S. dollar (or USD) and the Australian dollar (or AUD), the Japanese yen (or JPY) has strengthened even more, owing to its safe-haven status.

Yet while JPY has strengthened practically across the board, as you would expect during a risk-off event, the euro's similar behavior is strange given that it is not viewed conventionally as a safe-haven currency. On the contrary, it has historically been viewed as a fairly risky currency; while it is the currency of the European Union, the EU is not considered as a politically stable region. The integration of many countries within the EU framework may have consolidated monetary policy, and eliminated currency volatility within the EU, but risks still remain and have instead

This article was written by

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Providing commentary and analysis, principally focused on global macro, foreign exchange, and equities as an asset class. Primary interests include equity investing from an international perspective, and FX fair values.

Analyst’s 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.

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