The Cyprus Bailout package did not inspire confidence, but instead added fear into the markets. EUR weakened significantly with EUR/USD gapping below 1.29 on Monday open. All other currencies were similarly impacted due to safe-haven flows. EUR/AUD wasn’t sparred either despite both currencies positively correlated to “risk”.
Price gapped lower below 1.25, extending the decline that saw some support on 14th March. Admittedly, the downtrend was still in play due to the failure of price to stay above the 1.26 level after failing to test the consolidation zone just under 1.265 on 13th Mar. The gap lower did not change nor accelerate bearish momentum, but rather allow current bearish momentum to continue the step-like sequence that has been in play since late Feb. Price has stabilized after the gap, consolidating around 1.245, below the swing log of 14th March. We could potentially see some upward pullback after such a heavy drop and Stochastic agrees, with readings forging recent new lows. Resistance can be found from the previous support and downward trendline will continue to weigh against any recovery rallies.
Daily Chart is equally, if not more bearish. An evening star formation has been confirmed below the significant support/resistance that was relevant back on 3rd Dec and 13th Jan. Stochastic readings are also deep in Oversold territory, which suggest that price may find some support around 1.24 round number, around the swing lows back in early Jan.
Fundamentally, despite Aussie’s weakness and RBA’s dovishness, EUR/AUD has been continuing lower – which underlines EUR’s fundamental weakness (Cyprus, Greece, Italy, Spain etc). Aussie on the other hand has seen recent turnarounds in fortune with GDP and Unemployment data both coming in stronger than expected. Though the rosy picture may not last forever. Capital Expenditures in Australia has been weaker than expected and that will impact long-term growth not just in the plateauing mining sector but also in the other sectors which were touted to overtake mining as future growth generators. Government spending is also increasing while revenue has dropped significantly – limiting ability for RBA and also the Government at large to intervene if the market face a double dip scenario. Nonetheless, even though both currencies are risk correlated, in the event of a risk-off selling, AUD may come up tops due to its Triple A status. Investors may wish to hold AUD deposits due to its stability and also enjoy higher interest at the same time, pushing EUR/AUD lower in the short-term, while supporting any AUD weakness.