Aussie Could Gain Following Recent Weakness

The Aussie dollar has been beaten down strongly this week following the rate cut by the Royal Bank of Australia late Monday night. However, markets may have over-reacted to this news and there could be some imminent catalysts in the currency's favor that could see it climb.

One pair in particular to watch is the EUR/AUD cross, which has been extremely volatile over the past few months. The pair was no exception in the summer swoon of the euro, seeing the pair drop to record lows over the summer as investors fretted that the euro would cease to exist. Since the announcement and subsequent implementation of Draghi's pledge to do anything to protect the euro, the pair has rallied to the highest level since June.

The above chart shows the recent moves the pair, dropping as low as 1.16193 in August before rallying both on broad euro strength and broad Aussie weakness. However, there are a few events in the near future that could benefit the Aussie and push the pair lower. Some of these events include:

• A new round of Chinese stimulus: China notoriously launches stimulus packages during its Golden Week holiday, which is this week. Analysts expect China to announce new measures to strengthen its economy, which would increase demand for raw materials as inputs. As Australia is resource rich, China imports lots of metals, notoriously copper, for which they need Aussie dollars.


• Recent news that a Spanish bailout may be delayed for some time as Europe looks to settle Spanish, Greek, and Cypriot issues all at once rather than individually could cause investors to sell the euro following its recent rally on hopes of an imminent bailout.


• Technically, the pair has taken out all of the major moving averages but has just failed on a test of the 76.4 percent retracement of the move lower at 1.2660 that began in May. Should the pair fail at this level again, it could foresee weakness in the near-term.


• Broadly, the news flow from Europe has been less bad as of late and followers of the crisis from its inception have seen the news ebb between crisis and complacency. The current complacency could be overshadowed by another round of crisis should Spain's situation worsen, early indications of Italy's upcoming elections foreshadow a return to the big-spending days of Silvio Berlusconi, or France's budget crisis worsens. Analysts such as Sean Egan at Egan-Jones ratings indicate that France could be the next, and hopefully last, proverbial shoe to drop in the crisis.

With all of these events in mind, should the pair fail at the important technical resistance, it could be that downside risks prevail. Investors could look to short the pair at 1.2660, at first in small amounts, and then more if the pair repeatedly fails at that level. Do note that currency trading involves risks outside of those of other investments and investors should always do their own analyses before trading.