EURAUD had a sharp melt up on Friday due to AUD being down roughly 5% and EUR down only 1%. At these levels we believe AUD is significantly undervalued against Euro. The last time S&P500 went to 5200 on 5th Aug’24 and Copper was then 412 (AUD is commodity driven), EURAUD was at 1.69. Now when S&P500 is at similar level and Copper still at 440 level (far higher than the Aug’24 level), EURAUD stands at 1.8150. Which is almost 8% higher than Aug’24 level. This looks to us extremely over bought. ECB deposit rate is 2.5% currently and market pricing of terminal rate is 1.65% whereas for RBA current policy rate is 4.1% whereas the terminal rate pricing is 3.09. This still does not explain the 8% over valuation of EURUISD. Hence, based upon both current interest differentials, forward interest rate pricing & global risk outlook, EURAUD looks extremely overbought. In addition, Eurozone faces 20% tariff whereas Australia faces only 10% tariff from US in the reciprocal tariff regime. In fact, Australia is one of the few large DMs which runs a trade surplus with US. Hence to us AUD looks severely undervalued against Euro and fair value is app 170. But since markets can remain unreasonable for some time, we believe 1.75-1.77 is where EURAUD should stabilise as market panic stops. Trade Summary: SHORT EURAUD (Half risk at CMP 1.8145 & half risk at 1.8545), TP 1.7745 & SL 1.8745.
