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The Anti-No Brainer Trade?

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In 2008, there were many so-called no brainer trades that were seemingly so easy to define that, if timed correctly, ended up hugely profitable. Think shorting banks, shorting MBS, or buying bank stocks in March of 2009. However, one trade that is familiar to currency traders was to be long the Australian dollar.

Since the end of 2008, the EUR/AUD has nearly halved and the AUD/USD has nearly doubled. This Aussie strength was brought upon by a central bank that refused to cut rates, at least to the scale that monetary authorities in the U.S. and Europe were cutting rates.

Combined with large capital inflows into the country to get exposure to its vast natural resources, the Aussie dollar has seen massive strength in recent years.

Until recently, improvement in the economies of Japan, the eurozone and U.S., three of the most actively traded currency partners with the Aussie dollar, has seen the Aussie dollar weaken as of late. The EUR/AUD, for example, traded as low as 1.16057 in August, the lowest since the inception of the euro, and has rallied nicely to 1.2913 since then.

Looking at the chart below, the EUR/AUD is sitting just below the 100-week moving average for the pair. A break of these levels looks set to target a move towards 1.38547, the 38.2 percent Fibonacci Retracement of the 1.16057-2.11355 move from 2008 to 2013. Through this level, the pair would most likely target a return to the 200-week moving average at 1.41498.

There are a few catalysts for this move over the next few weeks. Economic data, including employment and home price data, has been softening as of late and has prompted calls for the Reserve Bank of Australia (RBA) to cut rates.

Currently, Bloomberg has the market probability of a rate cut, extrapolated from swaps markets, at 36 percent at the upcoming meeting on February 4.

Should data worsen over the next week or so ahead of the rate decision, this probability could tick higher, further strengthening the pair. A rate cut would surely send the pair through the 100-week moving average and above the 1.38547 level.

Stock chart: 
Stock chart

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