The Trade Week Ahead – Staying the Course

I remain solid in my view short bias of EURAUD, I see the June low as the next level of support and thus want to remain short all the way down to 1.53.

The technicals are telling me so but so does the macro backdrop for the remainder of 2018 and into 2019

EUR Side:

• The so called EU ‘renaissance’ in growth has faded as geo-politics and general malaise filtered through in late 2018 and will likely carry through into 2019. The leading activity metrics that were firing in early 2018 are now behind the EU area.

• The slack in traditional measures such as employment and manufacturing has been almost fully absorbed, meaning less room for further growth.

• Trade issues remain a headwind.

• 2019 will see geo-politics come to a head with the European Parliamentary elections. The rise of nationalism will likely be a head wind here: France, Italy and Germany have seen a large rise in nationalism.

AUD side:

• Overall strength in traditional measures, growth in 2018 has and will remain ahead of consensus, employment is booming and absorbing slack, wages are growing at their strongest levels in 16 quarters and consumer confidence is peaking.

• Despite “doomsday” calls of a housing crash in Australia the supportive macro fundamentals are consistent with above-trend growth for 2019 and confidence in employment is likely to put a floor in the housing market reducing its possible headwind issues.

All confirms my short bias on EUR/AUD

AUD is still a proxy for EM

However, AUDUSD is a different story despite the domestic economic strength. AUD has had three failures of the 73.00 handle as EM remains uncertain. The pair looks range bound now between 70.50 and 73.00 it will need a circuit breaker in my opinion to breakout either an EM positive break out story or, some US strength that smashes through the lower support.

I’m leaning to the latter as China is the key and here is why:

• EM and AUD remain tightly correlated – the MSCI EM index is dominated by China and further deceleration in China and thus EM will likely mean the AUD will test 70.5 pretty quickly.

• China has been flexible in easing policy to buffer the slowdown – see the changes to the reserve requirement ratios, the debt to equity swap program and moderating but still solid infrastructure programs – but it is only buffering, not accelerating.

• The uncertainty for the market is what does the economic roadmap for China farther out look like?

• Is there a possibility of the debt-driven growth model making a ‘return tour’?

• Will there be a diminished economic role of private enterprises?

These 2019 outlook points add to concerns for EM and thus AUD. Therefore; currently neutral on AUDUSD however I see EM downside risks thus have a slight negative bias on AUDUSD.

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