One year ago, the EUR looked bullish as ever as many expected EURUSD to reach 1.50's and beyond. It was in July of last year that it had started it's initial descent, which has continued right throughout the past year.

Last year I wrote an article titled A Comprehensive Fundamental & Technical Analysis on EURUSD (Please click the link to read). It outlined some of the reason we could see some downside in the pair.

Euro Outlook

In the previous article, we looked at fundamental factors, such as inflation. In fact, this graph was posted in that exact article.

Figure 1 - Euro Inflation as of July 2014 - hovering at 0.5%

Since then, we have seen the ECB Implement several measure including rate cuts and QE. The main argument for the July 2014 article was that the Eurozone was facing a period of disinflation. Let's see how it is doing today.

Figure 2 - Euro Inflation as of July 2015 - Down 0.3% from July 2014

How is it possible that after all of ECB's efforts, we are sitting at an even lower inflation rate? Well in all fairness, inflation is a global concern at the moment which has been fueled by a sharp drop in oil prices. At the same time, EUR is one of the few currencies that benefited from easing during the same time period.

Let's look at some further data

Figure 3 - Year over year comparison of key fundamentals

As noted on the graph, the other much looked at data figure, unemployment has also fallen during this same time period by 0.5%.

Euro Outlook

An entire article can be written on the fundamental side of any currency. The above provides a general overview, which states that despite the ECB's grand efforts, the eurozone generally is not in a significantly better place than it was a year ago. Further, it would be safe to say we will not be seeing any rate hikes coming from this area in the near term future, nor any fundamental reason for extreme bullish breakouts.

The Carry Trade

Several articles have already been published here on what a carry trade is and it's purpose. In a simple explanation, it is a trade where the interest of the currency you are long, is higher than the interest of the currency you are short. And therefore, you get paid!
If you'd like some more detail, I recommend Daytrader21's Article Carry Trade Returns (Please click link to read), which also happens to be written in July 2014.

The Numbers

The carry that is paid will largely depend on how you trade your account. More details can be found by clicking here

Figure 4 - Dukascopy Overnight Swaps

Please visit the previously mentioned link. These rates are dependent on what type of account you have (Regular/Advanced/Premium), for the purpose of this article, we will use advanced, but generally the proportion of the overnight swap is the same from one another.

The EURAUD trade

This trade is quite appealing for both the technical reasons as well as fundamentals. Here are the key Australian details

  • Inflation has dropped to 1.3% down from last year, however a rate cut was recently introduced which will have a positive effect on inflation
  • Monetary policy minutes provide no indication of further rate cuts or intentions of introducing QE programs
  • Strong housing market leads the belief that low interest rates will not be sustainable over the long term
  • Unemployment steady on the lower end of the yearly spectrum at 6%
  • Weekly Channel in play. A Bearish Engulfing pattern has already appeared on the weekly chart right at the top of the channel

Figure 5 - EURAUD Weekly Channel and Bearish Engulfing Pattern

EURAUD Conclusion

The fundamental and technical view in this pair is the clearest, and offers the excellent risk to reward with invalidation levels above recent weekly highs and above the channel. Targets would be towards the bottom of the weekly channel, offering good profit potential on the trade as well as Carry interest.

The EURNZD trade

The trade offers a higher swap than EURAUD but possibly at a price. Here are the key talking points.

  • Upside momentum is extremely strong as the RBNZ took the Kiwi dollar from a rate hike cycle to a pause to a rate cut cycle all within less than a 1 year period
  • As NZD was in a hike cycle, future expectations of a hike between the EUR and NZD would clearly come from NZD first
  • Previous pricing may have been oversold for NZD as the market expected a hike, recent downside momentum for NZD can be attributed to the market price adjusting for the rate cycle.
  • Trading towards the top of it's channel with weekly signs of up movement exhaustion. July Monthly Candle forming a doji.
Figure 6 - EURNZD showings Candlestick pattern's of exhaustion near the top of its' weekly channel

EURNZD Conclusion

The pair is a bit more difficult to enter after such a strong up move, however the longer term outlook shows the pair is in a multi decade downtrend. A recent rate cut may hint to the markets of further cuts to come. The monthly chart at the moment looks to be forming a doji, waiting for the candle close may be beneficial prior to entering the trade, so as to obtain more information from this months RBNZ meeting. Although this pair provides a higher swap, further confirmation can provide stronger conviction in this trade

The EURTRY trade

The trade offers the absolute highest carry out of all three, but long term trends make it more difficult to enter this trade. Here are the key talking points

  • Jobless rate at 6 month low
  • 3 consecutive months of improvement in Jobless rate
  • Unemployment rate showing significant month over month improvement year to date
  • Longer term trends are bearish for TRY
  • Despite recent improvement, inflation rates remain relatively high compared to global standard.
  • Technical setup shows the possibility of a down channel formation with two previous rallies haven broken their trendlines, but the setup is not too strong.

Figure 7 - EURTRY Possible weekly downchannel in the making

EURTRY Conclusion

The pair offers the greatest return in terms of carry, but has been in a long term uptrend. The possibility of gaining on the trade is less likely here than it would be on the previous two pairs, but there is still good potential for swap interest. The technical setup provides less conviction, but even a range here could prove to be quite profitable.

The Carry Trade Conclusion

In summary, the above 3 trade setups over potentially different outcomes. While there is a strong possibility EURAUD can decline from current levels, the possibility is significantly less in EURTRY. But at the same time, the carry on EURTRY is over 4 times greater. The purpose here is to offer a setup for traders of different risk appetite. If objective is to profit from the trade, or from the carry,The Euro is certainly offering some good setups once again, this time of the year.
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