Improving global risk sentiment and widening Australia-eurozone interest rate differentials will likely place further downward pressure on EUR/AUD, in our view. News from the EU summit has so far exceeded market expectations and provided broad-based support to risky assets. However, we do not think any of the announced measures are game-changers for the EUR and we remain bearish EUR/USD, forecasting a depreciation to 1.15 in 12m. Furthermore, we continue to expect the ECB to cut interest rates by 50bp in July and to become more proactive about protecting growth.
In contrast, we expect the RBA to hold rates at 3.50% at its next policy meeting on 5 July, in line with the consensus forecast. The interest rate market is only pricing in 4bp of rate cuts but still pricing in 80bp of cuts for the remainder of 2012. We expect an unwinding of these expected cuts to provide a floor under AUD/USD. Loose, and potentially looser, global monetary policy from the Fed, BoE and ECB and stabilising Chinese growth are also likely to provide support to the AUD.
We therefore recommend buying a 1m EUR/AUD put spread (strikes: 1.2350 and 1.2130), cheapened through selling a 1m EUR/AUD call (strike: 1.2750). The total structure costs 41bp and has a maximum payout ratio of 3.3:1. As long as EUR/AUD remains below 1.2550, the near-term technical resistance, our Technical Strategists are looking for further declines to 1.2000. The recent multi-year low of 1.2130 provides some technical support.
Barclays Capital