It appears the euro and Australian dollar are trading places.
The prospects of the Australian economy are weakening and it appears, for the time being that the forex market is willing to accept a Spanish bailout without destroying the euro.
FOREX SURPRISE
Shocking 19 out of 28 Bloomberg economists late last night, the Reserve Bank of Australia lowered its cash rate by 25 basis points to the 2009 level of 3.25 percent. Most experts thought the bank had more time on their hands.
CHINA CONNECTION
The domestic economy is declining because China is slowing down and prices of iron ore and coal continue to drop. With inflation running low, expectations are now high for an additional cut at the next meeting in November.
EURO GAINS
In just one month, the euro strengthened against all of its major trading partners, despite the prospects of a Spanish bailout, euro zone unemployment remaining at a record high 11.4%, and harsher austerity measures to come to the indebted countries.
In July, Germany’s parliament approved to providing up to 100 billion euros in aid to Spanish banks. At the end of this month, Spain needs to refinance around 29 billion euros in maturing debt. The financial markets are pricing in a bailout request, regardless of a Spanish delay to accommodate Germany’s request for spacing out aid requests or for the creation of a bundled bailout to also include the needs of Greece and Cyprus. Despite the heightened return of the sovereign debt issues in Europe, the euro is stronger.
THE CHART
EUR/AUD has rallied tremendously since the middle of August from its record low of 1.15812.
This recent rally has confirmed the breakout above both the 200 day simple moving average and the major downward resistance line from the November 2011 high.
KEY LEVELS
With no major barriers in sight, price action might not find resistance until reaching the 1.2720 area, which happens to be the 78.6% Fibonacci retracement level of the May to August swing. Further upside targets include the important psychological 1.30 level. A retracement towards the 1.2445 level might negate immediate upside momentum.
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