EURAUD
There could be a divergence setting up between Europe and Australia which favours EURAUD upside.
Euro strength ahead
Europe now has falling COVID-19 cases. Germany's COVID-19 R rate is below the critical 1.0 number which indicates the disease is shrinking in its growth pattern. The R number is the average number of secondary infections produced by 1 infected person. An R number of 1 means that on average a further 1 person will be infected by the patient. An R number of 0.5 means that for every 2 infected people there will be one more infected person.
Furthermore, the proposed PEPP programme of around €1.35 trillion alongside a proposed Recovery Fund to support the most struggling EU members like Italy should keep the EUR supported as long as the recovery fund is expected to be accepted. Next week European Leaders will be meeting to authorise what could be a huge stimulus package. Although the package has been well signalled it is not fully priced in and it does still remain to be seen whether the Recovery Fund can be agreed next week. Latest signalling is that this is unlikely.
Aud weakness relative to Euro strength
Australia, in contrast, has been forced back into lockdown measures as COVID-19 cases rise in Australia's second most populous state of Victoria
Interest rate differentials are also moving to help the Euro higher against the AUD. EUR yields are in negative territory, but the gap between AUD rates is narrowing as the RBA has cut rates down to 0.25%. In March the spread at the 2 year was around 112 bps. It is now down to 58bps which should support EURAUD upside from here.The key risks to this outlook is whether the European Recovery Fund is rejected by the frugal four. The countries of Austria, Sweden, Hungary and Denmark are opposed to some of the core parts of the proposed fund. This will weaken the EUR and invalidate this outlook if the frugal four (five if you include Finland) reject the proposal. Any fast fall in Australia COVID-19 cases would also invalidate this outlook. Buyers could be at market with stops running below 200WEMA
