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AUDNZD Looks To Avoid A Swell In Risk Tides To Support Range

Monday, 05 January 2009 19:49:39 GMT  |  John Kicklighter, Currency Strategist

The markets are filling out after the year-end lull; and the impact on volatility and price action has been clear. However, as traders return so do the market’s major trends. From a fundamental and technical perspective, AUDNZD has a natural hedge on both fronts.

Why Would AUDNZD Hold a Range?   ·         Levels to Watch: -Range Top:       1.2225 (Range, Trend) -Range Bottom: 1.1625 (Pivot, Fib)   ·         Liquidity has surged at the start of this first full week of the new year. However, a new year does not mean a new start from a fundamental perspective. The long-term implications on yields and volatility developed through the global recession and financial crunch have carried over – and are perhaps more prone to speculation now. AUDNZD has a natural hedge as both currencies are high yielders, but there is still economic imbalance.   ·        There are conflicting chart patterns carving the AUDNZD future. Momentum through the October reversal has produced a relatively steep rising trend channel. Alternatively, a steady trend line and notable range activity around 1.2200/25 has held the market back from further developing a larger trend. However, regardless of direction, a break will come.   Suggested Strategy   ·         Short: Half-sized entry orders will be set at 1.2200 –below Monday’s intraday high.   ·         Stop: An initial stop at 1.1.2340 is well above the December 8th swing high to avoid false breaks. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (140) at 1.2060. The second target will be 1.1860.

Trading Tip – The markets are filling out after the year-end lull; and the impact on volatility and price action has been clear. However, as traders return so do the market’s major trends. From a fundamental and technical perspective, AUDNZD has a natural hedge on both fronts.  For long-term pressures, fundamental concerns will overwhelm price action; and even short-term price action has responded to a revived speculation in the development of risk sentiment. However, whether risk aversion or risk appetite takes hold, this pair will naturally be hedged as both currencies are considered high-yielders and backed by export economies. At the same time, from price action alone, we can see that congestion has further developed heavy resistance around 1.2000/25. On the other hand, there are certainly cracks in this foundation. There is heavy event risk over the next few days and these two currencies aren’t fully balanced when it comes to risk. What’s more, a breakout will be forced eventually as two clear trends are conflicting. To account for this risk, we have reduced our position size (we are going against prevailing momentum), widened stops and we will put a time limit on this trade.  We will cancel any open orders by Wednesday any lingering positions by the weekend liquidity drain.

Event Risk Australia And New Zealand

Australia – The Australian dollar has appreciated against most of its major counterparts over the past few days, a reflection perhaps of a general rebound in risk appetite or even a shift in the currency’s place as a risky asset. Regardless, the shift is just beginning; so it will have to be an influence that is monitored closely as it could decouple the currency’s relationship to other notable trend leaders. Looking at more specific threats to volatility, the scheduled docket for this first half of this week is laden with significant market movers to watch out for. Alone, the AiG services and manufacturing surveys, home sales and trade balance numbers couldn’t normally force a significant breakout on their own; but together they may have enough of an impact. Retail sales on the other hand could potentially handle such a move by itself.

New Zealand – A relatively scattered and light economic docket leaves the New Zealand dollar open to more unpredictable fundamental trends. Growth trends have been relegated to the backburner for months; but this seems to be an influence that is picking up steam amongst other nations and their respective currencies. Therefore, if general risk trends (seen through volatility) settle, it would expose the economic prospects for the small nation – not very strong. Alternatively, should the new year revive the debate over risk sentiment, the kiwi’s high-yield and dovish rate policy will likely come back into focus.

 

Data for January 6 – January 13			Data for January 6 – January 13
Date	Australian Economic Data		Date	New Zealand Economic Data
Jan 5	AiG Performance of Services (DEC)		Jan 6	Trade Balance (NOV)
Jan 6	HIA New Home Sales (DEC)		Jan 12	NZIER Business Opinion Survey (4Q)
Jan 6	Retail Sales (NOV)		Jan 13	Building Permits (NOV)
Jan 7	AiG Performance Of Construction (DEC)
Jan 7	Trade Balance (NOV)

 

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

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