AUDNZD Offers a Tolerable Setup for a Market that Does Not Favor Range Trading

Published October 16th, 2009 - 12:12 GMT

The past 24 hours has seen extraordinary price action for the currency market. Both the British pound and Japanese yen crosses have produced severe moves that have cleared many range boundaries and have not offered any sign of retracement in the near-term.




How stable is the AUDNZD Range?
• Levels to Watch:
-Range Top: 1.2430 (Channel, Fib, SMAs)
-Range Bottom: 1.2000 (Channel, Fib)
• Both the Australian and New Zealand dollars have come into strong rounds of data through the past week. For the kiwi, the RBNZ’s announcement that it will remove some of its emergency stimulus was fortified by higher than expected 3Q consumer inflation to brighten the outlook for monetary policy. The Aussie outlook is still more hawkish though with RBA Governor Stevens saying the central bank can’t be too timid with raising interest rates.
• The sharp rally of last week has lost its momentum. This solidifies the influence of resistance near 1.2400/50 where the descending trend channel of the past five months caps out. What’s more, we have a notable 50% Fib retracement of the May to Oct bear wave and the collection of both the 100 and 200-day SMA.
Suggested Strategy
Short: Considering the tempered chop of the past week, an entry of 1.2390 is reasonable.
Stop: Placing a stop of 1.2470 is not far above the range high; but we have a volatility buffer. To secure profit, move the stop on the second lot to breakeven when the first target hits.
Target: The first objective is 1.5 times risk (120) at 1.2270. The second is 1.2150.

Trading Tip – The past 24 hours has seen extraordinary price action for the currency market. Both the British pound and Japanese yen crosses have produced severe moves that have cleared many range boundaries and have not offered any sign of retracement in the near-term. Elsewhere, we have seen the dollar maintain its painfully slow push lower while the commodity currencies chop higher – with technical levels showing little if any relevance to the market’s pace. This is clearly not a time to be looking for range opportunities. However, for those that think conditions will settle, there are some risky setups that are presenting themselves. AUDNZD offers one of the most reasonable presentations in terms of trade risk and fundamental pressure. Over the past few weeks, the Aussie dollar has been driven higher by a surprise rate hike, better than expected employment trends and most recently comments from RBA Governor Stevens in which he set an impetus for a potentially aggressive rate policy. Looking ahead though, the fundamental engine looks to cool. The kiwi dollar has been able to somewhat match this bullish push with strong inflation of its own and the RBNZ announcing its intentions to rein in its stimulus. The chart paints a picture of a reasonable setup. The past week’s worth of price action has worked to spill off the momentum in that 500-point rally from the 6th to the 12th. Our entry is not set at the very edge of the range (as that could be too aggressive); but that also means our initial stop is relatively tight. If the market slowly climbs to its channel extreme, a burst of volatility could whip us out in a false breakout. We will cancel all open orders by mid-US session tomorrow.

Event Risk for Australia and New Zealand

Australia
– There seems to be no stopping the Australian dollar. The currency is without doubt the best positioned bull among its major counterparts thanks to an economy that has been able to avoid recession and a policy body that has expressed its clear intentions to act as readily to the present recovery as they did with the initial financial crisis when it comes to stimulus. However, there is now considerable bullish premium priced into this currency and to further the currency’s cause, we would need to see even more bombastic calls for hikes and growth. Realistically, keeping up with this speculation is going to be increasingly difficult. Looking at the economic calendar over the coming week, there aren’t many scheduled events or indicators that can fuel such a drive. The RBA’s Lowe will speech and the bank’s minutes won’t carry the authority of the past hike and Steven’s comments. And, the Westpac Leading Index and CBAHIA housing affordability index don’t carry the badge of top market mover.

New Zealand – What strength the New Zealand dollar has found recently has largely been associated to the draft found in market sentiment and the RBNZ’s unexpected announcement that they are going to begin rolling back emergency stimulus. The New Zealand economy is indeed improving; but policy officials are also trying to fight the appreciation in their currency. Unforeseen events can have an expected impact on price action; but for now, the data on deck will only have a moderate impact on the long-term outlook for growth.


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

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