AUDNZD Channel Offers a Risky Range Setup

Liquidity and volatility were critical elements to price action this past week; but how will they factor in next week? While activity was high; we were generally able to avoid reviving major trends in either risk appetite or benchmarking growth forecasts. If the same conditions hold up next week, AUDNZD will likely hold its descending trend channel formation.

Trading Tip – Liquidity and volatility were critical elements to price action this past week; but how will they factor in next week? While activity was high; we were generally able to avoid reviving major trends in either risk appetite or benchmarking growth forecasts. If the same conditions hold up next week, AUDNZD will likely hold its descending trend channel formation. Our suggested bullish setup is complicated from both a fundamental and technical standpoint. Approaching this pair with economics and interest rates in mind, the Australian dollar is in far better shape and its prospects are far-and-away superior to those of New Zealand. Yet, how much of this advantage has already been priced into this exchange rate? Just off its highest level in nine years, perhaps the market is not fully allowing for a relative recovery in the New Zealand economy (and sharp recovery in interest rates)? These are long-term considerations; so we will have to monitor risk trends and short-term volatility following scheduled event risk in the week ahead to see how the underlying themes develop. The technical issue is far more difficult to reconcile. The past three months have shown a bearish bias for AUDNZD and August has supplied momentum to this bearing. So while we may be at the bottom of a trend channel and meeting Fib confluence, this is a strategy for those with a significant tolerance for risk.  An aggressive entry, wide stop and reasonable first target are first steps that should be accompanied by position adjustment. We will cancel all open orders by Monday’s close.

Event Risk for the Australia and New Zealand

Australia – Risk appetite will hold its usual influence over the Australian dollar next week; but scheduled event risk may see a greater share of influence considering the big-ticket indicators scheduled for release. Most of the governments behind the major currencies have released second quarter growth numbers over the past weeks; but Australia (which was able to avoid recession through the first quarter) doesn’t report until September 1st. With the global economy on pace to return to expansion, positive growth from the Land Down Under may not have the same impact; but it will nonetheless factor into how the currency responds to larger ‘themes’ like risk appetite. In the meantime, second quarter construction activity, private investment and corporate profits will all offer a good estimate for 2Q GDP as well as the trends into the second half. As for market sentiment, trends could be set by this weekend’s Jackson Hole commentary, GDP readings or economic sentiment readings; but realistically any catalyst will be unforeseen. 

New Zealand – While it does not usually have a significant impact on kiwi price action, scheduled economic releases from the New Zealand docket should be taken into account next week. Second tier data like July Trade Balance and building permits will offer gauges of growth for certain critical sectors of the economy – namely exports and housing activity. Third quarter inflation expectations will not likely have much impact on RBNZ Governor Bollard’s policy approach, but it could guide speculators to project the eventual return to rate hikes. In the meantime, risk appetite will supply volatility and short-term direction.

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkickighter@dailyfx.com