Buy AUD/NZD on Move Above 100.0 Fibo Extension

The Aussie-Kiwi pair, comprised of two of the more ‘risky’ currencies, has traded in a steady descending channel since March as the Kiwi has been the world’s strongest currency since the coordinated intervention on March 17 on behalf of a weaker Yen. As both the Aussie and the Kiwi have gained across the board over said time frame, the pair has oscillated between Aussie and Kiwi strength, but mostly Kiwi strength, since mid-April. As rate hike expectations have shifted over the past few weeks, with Aussie expectations deteriorating, while Kiwi expectations have risen, the pair has traded sharply lower over the month of July. Now, as the pair approaches its Range Bottom, and the pair’s technical indicators point towards strength, traders are positioned well to take profits on a rebound in the pair.

Levels to Watch:

-Range Top: 1.3000 (Trend)

-Range Bottom: 1.2400 (Trend)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The chart below shows the Fibonacci extensions and how the AUD/NZD pair trend could unfold in the coming days, off of the June 6 High at 1.3182, the June 9 Low at 1.2806 and the extension to the July 1 High at 1.3024.

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

• Long: Place an entry at 1.2649 (100.0 Fibo)
• Stop: Set the stop to 1.2499 (150-pip risk)
• Target 1 (Risk/Reward Ratio): 1.2738 [76.4 Fibo, move Stop to 1.2649] (89/150, 0.59)
• Target 2 (Risk/Reward Ratio): 1.2823 [20-DMA, move Stop to 1.2738] (174/150, 1.16)
• Target 3 (Risk/Reward Ratio): 1.3014 [50-DMA] (365/150, 2.43)
• Timeframe: 7- to 14-days

Trading Tip – While interest rate expectations have shifted markedly in favor of the Kiwi, the pair appears to be overextended, and with it at its Range Bottom, it appears to be an optimal time to go long the AUD/NZD pair. The daily RSI is in oversold territory, at 28, and has been oversold for a few days now. The MACD Histogram remains diverged in a bearish move, though the differential has narrowed over the past few days, to -30 from -34 on July 19. The Slow Stochastic oscillator has already issued a buy signal, with the %K at 12 and the %D at 9. While the pair is already moving slightly higher, I believe it is best to wait for an entry at the 100.0 Fibo extension off of the June 6 High at 1.3182, the June 9 Low at 1.2806 and the extension to the July 1 High at 1.3024. At that point, the RSI should have moved out of oversold territory, and the MACD Histogram into a bullish divergence.

Event Risk for Australia and New Zealand

Neither country has significant data due the remainder of the trading week, but with inflationary data and a rate decision in the middle of next week, price action will be high for Aussie- and Kiwi-based pairs.

Australia – Australia has a few significant data releases next week, starting on Monday, when the producer price index is released for the second quarter. Australia hiked rates last in November, an unexpected move, and the effects of such a move are projected to have worked, as producer prices are forecasted to have fallen in the second quarter. Similarly, as prices have remained relatively muted, costs haven’t been passed onto consumers, with the second quarter consumer price index forecasted to show a slight uptick, to 3.4 percent from 3.3 percent.

New Zealand – The most significant event on the docket for New Zealand is the rate decision on Wednesday. The Kiwi has surged in recent months, even as rates fell in the first quarter following the earthquake in Christchurch, New Zealand. Accordingly while there is a meager 6.0 percent chance of a 25.0-basis point rate hike at their meeting on Wednesday, 94.0-basis points are being priced into the Kiwi over the next 12-months, the most among the major currencies.

Written by Christopher Vecchio, Currency Analyst

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