While the euro has benefited from valuation gains in Q1 reserve data, the fundamental case for sustained strength remains limited. Most of the recent rise in EUR holdings was passive driven by currency appreciation not fresh buying. Survey data also shows that central banks are still cautious about increasing EUR allocations aggressively in the short term.

In contrast, the Australian dollar despite being sold heavily by reserve managers may be undervalued relative to its fundamentals. The Australian economy remains resilient, supported by strong terms of trade, stable employment, and a central bank that is more likely to hold rates steady or turn hawkish if inflation persists. Additionally, recent efforts by China to stabilize its property sector and boost domestic demand could support commodity-linked currencies like the AUD in the near term.

This makes EUR/AUD vulnerable to a reversal, particularly if eurozone growth underwhelms while Australia benefits from improving risk sentiment and Asian demand.

SHORT EURAUD

Jul 11 2025