EUR/AUD: Mind A Tactical Bounce Into French Elections
FX markets have been consolidating for a few weeks now without embracing a clear trade. This suggests trading mean-reversion patterns in the near term, carefully avoiding exposure to upcoming tail risks. In this context, the performance of G10 currencies against the dollar since the start of the year is striking (Graph 1). All currencies have performed, with AUD posting a stunning 7% return, whereas the EUR is at the bottom of the ranking at close to its start January level; The naive tactical trade to position for convergence is therefore going long EUR/AUD before the French election. EUR/AUD has lost about nine figures since the start of the year on the back of political fears pressuring the EUR and the risk-friendly mood supporting the AUD via metals. But the pair is now testing the 1.37 support (Graph 2). A continuation of the decline would require a break of this support , which would involve rapid decisive moves such as EUR/USD breaking below 1.05 and/or AUD/USD breaking above 0.77. On the other side, our technical analysts believe that the November low of 1.4040 should cap upside. In our view, there is a high probability that EUR/AUD can mean revert higher in the near term and a low probability that it can fall significantly. Both developments can be attractively traded via options.