A look at EURAUD FX.

This currency pair has been one of the more interesting trading currency pairs in recent times, with plenty of movement, direction, and liquidity. A few weeks ago it made a breakout of a daily basing pattern, this week it has retested the breakout of this pattern, and bigger picture it resides close to some potentially key pivotal points. - At present this makes it in my opinion a relatively cheap option to get long, however there are a number of forces at work both macro and technical which have the ability to push the market either way.

The first chart I will look at is the spread of short-term rates, both nominal and inflation adjusted, on AUD and EURO. The rate differential between these two has been a favourable argument for being long AUD versus the EUR in recent years, currently the pick-up in carry is 3.25% in favour of the AUD. This is a powerful incentive to favour holding AUD, Looking at the charts below, which shows this in negative terms, in order to match the quote terms of the currency pair, and comparing these spreads to the charts, it is easy to see how this aspect has heavily influenced this pair for some time. - However, it also appears that the last move lower in recent months is a bit of a discrepancy in this relationship. I would also like to add that there seems a high possibility that the spread may start to move higher soon, both nominally and inflation adjusted, RMDfx has posted a good article highlighting the risk of this, which can be seen here. Whilst the EURO debt crisis has the ability to unhinge the EUR, as per yesterday's post (See here) the EUR continues to show resilience.

Looking at the technical picture, a couple of things jump out at me:

The monthly chart above shows a potential bullish 'Morning Star' type pattern over the past few months, though follow though this month would be needed to keep this alive. 

On the weekly picture, there seems to be a number of potentially bearish developments, but also a potentially bullish pattern, which highlights the current pivotal nature of price action. The chart below shows the weekly picture. I have highlighted the major descending trend-line, this recently capped the move higher in the currency pair, and also the consolidation band through last year, which acted as significant resistance on the recent rally. The recent rally has also highlighted a potential 'Bearish descending scallop pattern, (I have included an example of this below), however this could also be a Bullish ' Rounded-Bottom' basing pattern. (example of this below also).

Finally looking at the daily chart (See below). - The current pullback has also extended to some key pivotal areas: Noticeably the peak in February at 1.2618 which once broken then became support, the 28.2% retrace of the February to March rally at 1.2613 and what appears to be an approximate rising trend channel base, though this is still not mature enough to confirm as a true trend channel in my humble opinion.

Summing up: I believe this may soon start to continue its recent upside move at some point soon, however the caveat for me is to not make a meaningful break below 1.2600 as there remain some strong bearish pressures still, I believe a negative breakdown through 1.2600 may bring these back into play. - On a risk/reward basis, I believe makes the long trade here a relatively cheap trading strategy, if one considers using a relatively tight stop below 1.2600. - Te upside may struggle as it runs into resistance, but a break above 1.2910 recent high, could propel this much higher, particularly if the RBA soon take a more dovish stance.