Fundamentals

We are particularly attracted to relative value trades this week because we think FOMC and NFP will be uneventful given the lack of uncertainty in Fed policy and U.S. data. This is not just a busy week for the U.S. but also for euro, which is having a very difficult time recovering. Inflation is the European Central Bank’s top priority but despite all of stimulus provided last month, CPI growth is expected to be anemic. According to the economists surveyed by Bloomberg, annualized CPI growth is expected to hold steady at 0.5% with core price growth also remaining unchanged at 0.8% in the month of July. Considering that the ECB has a 2% inflation target, these numbers indicate that price pressures are far short of desirable levels. Based on CPI alone, the ECB should be actively discussing ways to increase stimulus further. Traders are clearly anticipating further weakness in the currency pair and if this week’s economic reports reinforce everyone’s concerns about Eurozone growth, euro could extend its slide, driving EUR/AUD to fresh 7 month lows. Aside from the CPI report, Eurozone confidence, German retail sales, unemployment and final EZ PMIs are also scheduled for release. The Australian dollar on the other hand traded higher today on the back of stronger Chinese industrial profits. These figures confirm that China’s economy has bottomed and is in the process of recovering. If the Chinese PMI manufacturing index due later this week also surprises to the upside, we could see a further decline in EUR/AUD.

Technicals

Taking a look at the weekly chart of EUR/AUD, support in the currency is at 1.4225, the 38.2% Fibonnaci retracement of 2012 to 2014 rally. If this level is broken, the next stop for the currency pair should be the November swing low of 1.4050. A break 1.46 would be needed to negate the downtrend in the pair.