Euro decline limited, AUD under pressure

EUR looks like it’s going nowhere fast, with the currency failing to break above 1.33 versus the USD. Nonetheless any drop will be limited as there will be plenty of support for EUR/USD around the 1.30 level. Such support may be required following the disappointing reading for the Eurozone March flash purchasing managers index (PMI) and renewed growth worries even in Germany.

Moreover, there have been plenty of scare stories about ongoing problems in the Eurozone, centring on Portugal and Spain and even speculation of a third Greek bailout being needed at some point.

However, the reality is that the market has reduced its attention on Eurozone debt issues for the time being. Once the latest bout of risk aversion passes, this ought to allowing the EUR some room to push higher, with my short term models highlighting the scope for EUR/USD to edge back towards 1.35 over coming weeks.

AUD has been pummelled this week, alongside its neighbour NZD. Growth worries in China compounded by a weaker than expected March China PMI has piled on the pressure, especially on AUD where economic conditions are increasingly linked with China. My quantitative models highlight ongoing short term downside risks to both AUD and NZD.

However, declines in these currencies will provide better levels to eventually buy as I remain bullish in the medium term even though my valuation metrics reveal that both currencies remain overvalued. My view is built on the prediction that risk appetite will improve further this year, a boon to high beta currencies such as AUD and NZD. Additionally as yield gains importance and carry trades gain attraction AUD will look particularly attractive.

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