Euro Strengthens on Strong German Factory Orders Data

Euro Strengthens on Strong German Factory Orders Data

A recovery in the price of iron ore and coking coal to $72 per ton and $200 per ton, respectively, has resulted in the strengthening of the Australian dollar against its rivals in July. However, the Australian dollar was unable to gain against the Euro dollar, which remains ultra bullish due to an overall improvement in the Euro zone economy and the shift to hawkish stance by the ECB. Overall, the EURAUD pair has remained range bound between 1.46 and 1.50 levels for the past two months. We anticipate the Aussie to weaken against the Euro in the week ahead due to reasons provided below.

The Statement on Monetary Policy (SOMP) released last week indicated that the Reserve Bank of Australia is optimistic about the economy, but concerned about the overstretched value of the Australian dollar. Echoing a similar view, Daniel Been, head of currency research at ANZ, has stated that the recent rally has pushed the Aussie above its fundamental value.

In this regard, the analysts’ team at Oxford Economics, an independent research organisation, is forecasting a 3.5% depreciation in the value of the Aussie, over the rest of 2017.

ANZ Research does not expect further rally in the price of iron ore, which is the number one export revenue earner for Australia. The firm believes that iron ore would remain in a $60-$80 per ton range for the rest of the year. The assessment is based on the sharp increase in supply from the iron ore mines in China, as prices crossed above the upper band of the range. ANZ Research anticipates the excess supply will continue to keep the prices under pressure. The Australian economy is still adjusting to the end of the mining boom. On this basis, Oxford Economics expects the RBA to maintain the interest rates at 1.5% until 2020.

Additionally, the data reported by the Australian Bureau of Statistics indicate that the retail sales rose 0.3% m-o-m in June. The figures were higher than analysts’ estimates of 0.2% increase, but lower than the growth of 0.6% recorded in April and May. On the contrary, the data from the Euro zone continues to indicate an overall improvement in the economy.

According to Germany’s Destatis, price-adjusted new factory orders increased 1% m-o-m in June, compared with a 1.1% growth in May, but greater than 0.6% increase anticipated by analysts.

Similarly, in Italy, retail sales increased 0.6% in June, versus 0.1% growth anticipated by analysts. It is the largest recorded growth since January. The retail sales growth was unchanged in May, compared to the prior month.

Technically, the EURAUD pair is facing resistance at 1.4920. The currency cross has also broken the ascending trend line. Furthermore, the stochastic oscillator is descending from the bullish zone. Thus, we expect the EURAUD currency pair to decline to the next support at 1.4730.

EURAUD - Technical Analysis - 7th August 2017

In order to gain from the decline, we wish to go short in the EURAUD pair near 1.4880, with a stop loss order above 1.4960. If the pair descends as forecasted, the profit would be booked near 1.4730.

Investing in a put option would also enable us to benefit from the forecasted decline of the EURAUD pair. The contract will be bought when the pair trades near 1.4840 in the binary market. We would also choose a date around August 15th for the option expiry.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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