Economic Data Favours Short Positions in EUR/AUD

The “Aussie” received some bullish news on Tuesday evening with the release of the CPI figures and which rose more than expected. Preliminary Chinese PMI figures also grew from the last report. The news gave a boost to the Aussie, gaining more than 50 pips overnight. Today, in contrast, weak eurozone PMI data put some serious downward pressure on the Euro, quickly falling from 1.3000 to 1.2920 in less than one hour, although recovering part of the loss later in the day with news that Greece will get a 2-year extension period on its deficit goals. The EUR/AUD pair has been on an impressive uptrend since August 13, rising from 1.1615 to a high of 1.2823 seen a few days ago. Since the high, the pair has lost 300 pips now. Is the strong intermediate bull move now over and what can we expect over the next weeks?

The Draghi’s comments in defence of the Euro at the July London conference stopped the downtrend in the EUR/AUD pair dead and, emboldened by the  bond-buying program confirmation on September 6, the Euro continued its strong uptrendv the Aussie. The unanticipated interest rate cut by the Reserve Bank of Australia (RBA) early in October, along with some weak Chinese data, also helped the pair.

Yesterdays CPI data for the Australian economy showed third quarter CPI rising 1.4% while the year-on-year CPI rose 2%. Both figures were above expectations of a more modest increase of 1.0%-1.1% and 1.6%-1.7% respectively. The weakness the Australian economy has been experiencing led the RBA to cut interest rates three times this year – a total of 100 bps in cuts. More is still expected but this CPI report drastically reduced expectations for a cut until the end of the year.

The preliminary PMI data for the Chinese economy also showed a recovery from last month’s final reading, further decreasing the odds for a RBA cut in interest rates, as the Australian economy is a big consumer of Chinese imports.

The case for a renewed bearish trend in EUR/AUD was enhanced today with the release of the German Ifo index which unexpectedly dropped. PMI data shows a deepening Eurozone slowing, affecting not only the peripheral countries but now also Germany and France. The composite index dropped from 46.1 to 45.8 – its lowest level in more than three years.

The Euro has been rising in recent weeks on expectations the ECB would step in to save peripheral countries. But it can do this only after those countries ask for help from the bailout fund, and unfortunately for the bulls, both Spain or Italy seem presently to prefer to avoid huge social unrest and instead finance themselves at higher rates rather than engaging in further austerity measures just to have the ECB stepping in.

In my view, the Euro will continue to be pushed down while the Aussie will have to deal with rising inflation. As China recovers, the effect will also be positive for the Aussie. The pair EUR/AUD currently trades around 1.2534. Any move back towards 1.27 looks to be a good shorting opportunity. The recent high at 1.2822 may serve as a stop.