Possible reversal imminent in important risk trade

The EUR/AUD is an important forex cross in the realm of risk appetite/aversion. The Aussie’s high yield and aggressively growing commodity-linked economy offers a nice play for emerging market risk chasers, while the Euro’s liquidity make it a relative safe haven (though in the longer term, the irony is that global competitive debasement will lend commodity-linked currencies more bullish credence than the Euro’s Eastern Europe-linked toilet paper).

During the liquidity crunch of fall 2008, the EUR/AUD surged from the 1.6000s to the 2.1000s and during the QE liquidity-fueled risk asset rally from March 2009, the cross tanked back.

It is now sitting at summer 2007 levels, at multi-year support around 1.55, well below pre-Lehman levels. Meanwhile, the descending channel that has defined its descent since spring of last year is growing tired, and a reversal centered around 1.55 support may be at hand. Some consolidation around this area with an eventual breakout through the descending channel trendline may confirm a reversal at hand.

And such a reversal would indicate a return to a rush to liquidity, long overdue yet delayed by various black hole-engendering liquidity infusions from central banks.

This is an important cross to watch, especially in the context of the carry trade-fueled risk asset bubble that exists today, and a reversal could indicate a sharp mean reversion back to reality.

I personally was short the EUR/AUD from around 1.97 from the symmetrical triangle breakdown and had covered most of my position (admittedly prematurely) by around 1.87 when the cross hit its 200DMA. My entire position was fully covered at around 1.60 and I am looking to get long once the charts confirm a reversal at hand. This will also be an important indicator for my short triggers in other risk assets, including equities.


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One Response to Possible reversal imminent in important risk trade

  1. Pingback: Bye-bye January « Shadow Capitalism

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