EUR/AUD looks to have gone far enough – Deutsche Bank

Tim Baker, Strategist at Deutsche Bank, suggests that EUR/AUD has run hard of late, and is closing in on two-year highs - this is the worst cross for AUD amongst the G10 this year.

Key Quotes

“Where to now? At first glance, the rally looks overdone relative to rate differentials. But the longer sweep of history suggests that EUR/AUD is about fair vs rates. Which is the best way to look at it? The different conclusion comes because in recent years QE has seen EUR/AUD trading lower for a given rate differential. The cross seems to be converging to the old relationship as QE is being tapered. But that might be premature given policy is still very accommodative, as indicated by the shadow policy rate. All up, we see EUR/AUD fair-to-expensive on rate differentials.” 

“EUR/AUD also looks on the expensive side relative to iron ore – the two have tracked each other closely the past few years, but have recently diverged. But there are offsetting factors. One is the ongoing structural demand for EUR that our team has written plenty about. Another is the recent momentum in data – very favourable for Europe, disappointing in Australia. Data surprise indices have already moved a lot, supporting EUR/AUD topside, but could probably move further.” 

“Bringing it all together, we think EUR/AUD looks to have risen far enough for now, and would be neutral from here. We think a better option to express bearish AUD views is by selling vs EM and CAD. Those trades can capture the downside from weaker macro momentum in Australia, while largely hedging out the global growth/commodity price angle.”