There Is A Small Window For A Risky EURNZD Range

Volatility was once again catalyzed over the past 24 hours owing to a few unique events and the ever present fluctuations in risk appetite. For EURNZD, the euro’s sudden and aggressive plunge has confirmed the relative permanence of the past two week’s congestion band; but the medium-term bias and presence of notable event risk due in the immediate future make for a precarious range setup that only the most risk tolerant should consider.

 Trading Tip – Volatility was once again catalyzed over the past 24 hours owing to a few unique events and the ever present fluctuations in risk appetite. For EURNZD, the euro’s sudden and aggressive plunge has confirmed the relative permanence of the past two week’s congestion band; but the medium-term bias and presence of notable event risk due in the immediate future make for a precarious range setup that only the most risk tolerant should consider. For the range itself, support is weak compared to the ceiling on price action. Far more disconcerting is the bearish bias that has clearly developed since late April. Given these conditions, any range setup should have a very short life span (as the larger bias has a higher probability of taking over the market given enough time). As such, we will cancel all open orders within 24 hours. This will further help us to avoid major event risk in the first quarter New Zealand GDP release. Our strategy has to account for a high level of volatility and this market’s naturally aggressive price action. Therefore, a notionally wide stop is essential and position size naturally must be adjusted to make overall risk reasonable.

Event Risk for Euro Zone and New Zealand

Euro Zone – Perhaps the Euro Zone isn’t as strong as policy officials have been trumpeting recently. Today, the OECD lifted its growth forecasts for the collective 30 industrialized nations. With this improvement, the Euro Zone received a boost; but its forecasted stagnation through 2010 would clearly contrast the positive growth in the US and Japan over the same period. From growth to financial health, German seems to have damaged its hawkish forecasts by taking a decidedly dovish move of confirming a record debt sales through 2013 to fund the nation’s ballooning deficits in the face of shrinking tax revenues. Going forward, traders will look for evidence that the bullish outlook is indeed ill-founded. Specific pieces of economic data will offer a tangible benchmark for growth. German employment, Euro Zone confidence figures and German inflation will be critical readings for the medium-term outlook. The ECB may also prove a market moving event. While they are not expected to move rates, traders do want guidance for speculation.  
    
New Zealand – The New Zealand dollar is highly attuned to risk trends. However, it is the deterioration of the currency’s benchmark interest rate that draws the close link. With its yield advantage shrinking quickly, the currency’s primary appeal is fading. The outlook for growth and returns could collapse even further over the coming week given the heavy round of event risk on deck. Our top concern is the 1Q GDP release due on Thursday evening which will offer a bearing on how aggressive the RBNZ will have to be going forward to recharge the economy. Other notables that should not be overlooked are the current account balance and Westpac consumer confidence survey for the first and second quarter respectively. New Zealand is largely an export currency; and its trade deficit is a primary consideration for its credit rating. The sentiment reading is the best indicator to glean a sense of 2Q growth potential.