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Short-Term AUDNZD Range Survive Breakout Moves Across Market

Wednesday, 12 November 2008 20:32:04 GMT  |  John Kicklighter, Currency Strategist

The winds of risk aversion have picked up today and many yen crosses and dollar-denominated majors have seen breakouts because of it. One of the few pairs that still holds the technical and fundamental support for a reliable range is AUDNZD – though this backing may not hold for long.

Why Would AUDNZD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.1600 (Fib, Range Top) -Range Bottom: 0.7800 (Fib)   ·         Risk sentiment has shifted over the first half of this week, and many pairs that have a substantial exposure to yield have marked significant breakouts. With these first moves threatening to turn into trends with momentum, it is important when finding a range trade to have a fundamentally neutral pair. AUDNZD is well positioned. Both have to adjust for recession and each central bank will ease aggressively ahead.   ·         Though this pair has held relatively steady through the breakout period, the higher time frame technicals suggest there is substantial pressure behind the pair. The range between 1.16 and 1.1250 follows the break of a congestion band between 1.0870 and 1.1475. What’s more, there is a rising trendline (backed by a 20-day SMA) that is building pressure for an upside break. Suggested Strategy   ·         Short: Entry orders will be set at 1.1380 which aligns to the rising trend, and not range bottom.   ·         Stop: The initial stop will be set below the rising trend – but not range low – at 1.1325. To protect profit, we will move the stop on the second lot to breakeven when the first target is hit. ·         Target: The first objective equals risk (55) at 1.1435. The second target will be 1.1530.

Trading Tip – The winds of risk aversion have picked up today and many yen crosses and dollar-denominated majors have seen breakouts because of it. One of the few pairs that still holds the technical and fundamental support for a reliable range is AUDNZD – though this backing may not hold for long. From a technical standpoint, this pair has exuded range bound conditions since reversing from its multi-year lows back on Oct 12th. Recently, we have moved from one congestion band that held price action between 1.0870 and 1.1475 through most of October to a new range between 1.1260 and 1.1600.  However, the new band has moving support in a rising trendline that coincides with the rising 20-day SMA – building pressure into a potential breakout. The suggested strategy follows the bullish sentiment over the medium-term and entry works with the short-term rising trend rather than the range low. Considering our viable band is shrinking every day, we will cancel any open orders by Thursday’s close. Playing the range top is viable, but not recommended.

Event Risk Australia And New Zealand

Australia – Fundamentals may have a heavy influence on the Australian dollar over the coming week; but our time limit on our strategy should render our setup immune from most of its. The single indicator to fall within our time frame is the consumer inflation expectation survey for November – a good contributor to interest rate expectations. Should consumers believe, despite the pinch on income and lack of pass through in recent rate cuts, that their cost of living is falling; it would give explicit support to the RBA’s aggressive rate cuts. Beyond our purview of event risk, the twin drivers of recession and interest rate speculation will be recharged with a 3Q retail sales gauge, a growth outlook in the Leading Index and the RBA’s November minutes. Before all this scheduled data crosses the wires, we will need to be concerned about general risk sentiment. Should the swells of risk sentiment rise once again, it could easily drive the Aussie dollar down and through the floor of its range.

New Zealand – Scheduled event risk is substantial for the New Zealand dollar over the coming week. For the remainder of this week, the consumer will be in focus with a September retail sales report that will round out the full third quarter reading. Considering the modest improvement expected through September – in line with August’s rise – there is certainly room for surprise. Housing sales through October will be a key reading on the economy for the health of credit and consumer sentiment through last month. Next week’s data is second tier and will only influence our position should our trades have triggered by the close of tomorrow’s session. It is also important to monitor the strength of risk appetite trends. Should sentiment hit an extreme, the kiwi dollar’s high benchmark makes it the most highly correlated currency on the high end of the yield curve. 

Data for November 12 – November 19			Data for November 12 – November 19
Date	Australian Economic Data		Date	New Zealand Economic Data
Nov 12	Consumer Inflation Expectation (NOV)		Nov 12	Retail Sales (3Q)
Nov 16	Retail Sales (QoQ) (3Q)		Nov 12-13	REINZ House Sales (YoY) (OCT)
Nov 17	Reserve Bank’s November Minutes		Nov 16	Performance of Services Index (SEP)
Nov 18	Westpac Leading Index (OCT)		Nov 18	Producer Price Index – Output (3Q)

 

Questions? Comments? You can email them to John at jkicklighter@dailyfx.com.

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