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EUR/USD, EUR/AUD: Safe haven appeal may strengthen if market turmoil erupts again

Article By: ,  Market Analyst
  • Markets are on edge about a potential repeat of the carnage seen in early August
  • A month ago, EUR outperformed as risk assets wilted
  • EUR/USD held up well on Tuesday despite turmoil in stocks
  • EUR/AUD breaks higher as risk appetite evaporates

Overview

If we are about to see a repeat of the market carnage seen in August sparked by renewed US recession fears, there are worse places to hunker down than EUR/USD in the near-term.

You just need to look at the reaction a month ago to see that rather than waterfalling lower, euro strengthened against the greenback and other G10 FX names except the Japanese yen and Swiss franc.

Importantly, while EUR/USD declined on Tuesday, the moves were controlled with the price continuing to respect prior levels, suggesting there was little forced selling taking place.

EUR/USD: safe haven credentials put to the test

The first thing I want you to look at in the EUR/USD daily chart is the rolling 10-day correlation (bottom pane) it had with US two-year Treasury yields back in early August when the market carnage escalated. It was very strongly inversely correlated, meaning the pair often moved in the opposite direction to bond yields.

While the same reaction is not guaranteed if we see a market meltdown on this occasion, it has recent form on the board as a relative safe haven. There’s no sign of the inverse relationship reasserting itself yet, but this is the first real sign of panic we’ve seen in weeks.

Despite the risk rout on Tuesday, EUR/USD peeked below support at 1.10452 but managed to reverse the move, suggesting level may be suitable to build trade setups around. MACD and RSI (14) are generating bearish signals on price momentum, although I’m not putting as much weight on them given current skittish market conditions.

Upside levels to keep an eye on initially include 1.1100 and 1.1200, with potential selling around 1.1075 in between. On the downside, should Tuesday’s low of 1.1027 give way, there’s not a lot of visible support evident until we get back to 1.0948.

EUR/AUD reverses higher as risk nosedives

While I’m keeping an open mind as to what EUR/USD may do in a major risk off episode, I’m more definitive as to how it’s likely to perform against risker currencies such as AUD under similar circumstances: upside is far more likely than downside.  

The EUR/AUD daily demonstrates that perfectly, with the price shooting higher on Tuesday, talking out not only the 50 and 200-day moving averages but also former downtrend resistance dating back to August 2023.

If you look closely, the price has also managed to push above minor resistance at 1.64515, providing a decent zone to either set longs or shorts around depending on how sentiment towards the global economic outlook shifts.

Should it manage to hold above this zone, traders could establish longs above with a stop below the former uptrend for protection. Possible targets include 1.16582, 1.6756 and 1.7184.

If the price were to reverse back through this zone, the alternate option would be to sell with a stop above 1.64515 for protection. Potential targets include 1.62848, 1.61502 and 1.6000. For this trade to work, we’d likely need to see a stark improvement in sentiment towards the global economic outlook.  

RSI (14) has broken its downtrend, warning of a potential shift in bearish momentum. MACD is yet to confirm the signal but looks like it soon may. To reinforce the euro’s anti US recession qualities, as was the case when market turmoil erupted a month ago, EUR/AUD often moved in the opposite direction to US shorter dated Treasury yields.

As for near-term risk events that could generate volatility in EUR/USD and EUR/AUD, Wednesday’s US JOLTS report and Thursday’s ADP Employment and ISM service reports are the ones to watch ahead of US nonfarm payrolls on Friday.

-- Written by David Scutt

Follow David on Twitter @scutty

 

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