Strong French Industrial Activity Turns Euro Bullish

Strong French Industrial Activity Turns Euro Bullish

 
On Tuesday, the Euro dollar fell against the Australian dollar, a commodity currency, mainly because of the conciliatory speech made by Chinese President Xi Jingping. While speaking to the audience at the annual Boao Forum For Asia, Xi promised to open China’s economy to overseas companies and also slash tariffs on car imports from other countries. As tensions cooled, the Aussie, which is one of the most sensitive currencies in the developed world to changes in the market’s appetite for risk, rose broadly against all other G10 currencies. Additionally, iron ore rallied by about 8% to reach a level of $65 per ton. That assisted the Australian dollar’s uptrend. However, we are expecting the EURAUD pair to reverse trend and start going upwards due to the details given below.

Almost 80% to 85% of Australian iron ore exports reaches China. While there is no decline in iron ore Australian exports, the stock pile in China continues to grow at an alarming rate. According to the recent data from Steelhome Consultancy, iron ore inventories are at a record level of 161.68 million tons and a further increase is expected if the Chinese steel output does not accelerate by a considerable level in the coming months.

According to Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, Chinese demand is expected to grow only by 1.5% in 2018, down from 2.5% in 2017. Dhar said “a resilient manufacturing sector overshadows a subdued property sector.”  

The analyst also expects iron ore prices to decline further to $55 per ton by the end of this year. Despite a $5 per ton increase in the price of iron ore in the past week, overall, the commodity has declined by about $15 in March. So, the present uptrend can be only seen as a temporary bounce back.

Even the China-US trade dispute has only temporarily subsided and is a long way from a resolution. According to Petr Krpata, chief EMEA FX strategist at ING Group, more negative headline news will soon come out and it will have an impact on risk assets such as the Aussie.

Yesterday, the Reserve Bank of Australia’s Governor Philip Lowe warned that an escalation of international trade tensions would hurt global growth and seriously affect the growth prospects of the Australian economy.

The Australian bonds are no longer attractive to investors as it was in the past. After two years of rate hikes by the Fed, the benchmark rate in the US currently stands at 1.75%, versus 1.5% of Australia. The Australian central bank has categorically stated that it is not willing to hike interest rates without a rise in inflationary pressure and a credible wage growth. All these factors are expected to push the Aussie downwards. The Euro, on the contrary, is expected to get a boost from the recent French Industrial Production data.

French statistics agency INSEE (Institut national de la statistique et des etudes economiques) reported a 1.2% m-o-m increase in industrial production in February. It was lower than analysts’ expectations of a 1.5% growth, but better than 1.8% decline registered in the previous month.

On Tuesday, the Austrian central bank head and ECB member Ewald Nowotny stated that the ECB (European Central Bank) would be in a position to take the ‘patient off the drip’ by the end of 2018. This means, Nowotny expects the ECB to end the quantitative easing program by this year end. This is the first time a specific time boundary has been laid out by an ECB member. The statement made by Nowotny is positive for the Euro. Therefore, strong industrial activity and Nowotny’s statement is expected to trigger an uptrend in the EURAUD pair.

Technically, the EURAUD pair is forming an ascending triangle pattern as shown in the image below. The currency cross is also trading above its 50-day moving average. Furthermore, the on balance volume is making new highs. Therefore, we are expecting the EURAUD pair to break above the resistance in the days ahead.

EURAUD - Technical Analysis - 13th April 2018

To benefit from the probable breakout, we may open a long position in the EURAUD pair near 1.5940, with a stop loss order below 1.5810. After the long position is established, we would place a sell order to exit near 1.6120.

Simultaneously, based on the analysis, we may also invest in a call option to generate additional returns. The option may be bought only if the EURAUD pair trades near 1.5940. We also wish the option to remain active for a period of one week.

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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