pairs to range trade

AUDNZD May Be Buffered To Risk Trends But Its Range Is Still Exposed To Volatility

Monday, 09 February 2009 23:14:34 GMT  |  John Kicklighter, Currency Strategist

Is the currency market in the middle of a significant shift in sentiment? With the majors pointing towards possible trend reversals and many of the liquid crosses already on their way, this seems to be a legitimate possibility. Few pairs can hope to avoid this broad market driver; but if any exchange rate can, it would be AUDNZD.

Why Would AUDNZUD Hold A Range   ·         Levels to Watch: -Range Top:       1.2750 (Range High) -Range Bottom: 1.2550 (Trend, Fib, Pivot)   ·         For many of the majors and most liquid crosses, the market is hanging on edge of determining major trends. This imbalance carries significant weight for the entire currency market as major waves of buying and selling in a single currency through a very liquid pair often spills over to the crosses. On this front, AUDNZD is well positioned. Both currencies back commodity exporters whose central banks have slowed their pace of cut and growth has cooled.   ·         For price action, congestion from the past two week is obvious - though the levels may be somewhat blurred. Our primary interest is in support as we are looking to follow the steady rising trend that has been in place since the sharp October reversal. However, aside from a short-term rising trendline, this floor is relatively lacking in support.   Suggested Strategy   ·         Long: Half-sized entry orders will be placed at 1.2560 – just above Monday’s intraday low.   ·         Stop: An initial stop at 1.2460 is set wide enough to cover the next range of lows. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (100) at 1.2660. The second objective is 1.2760.

Trading Tip – Is the currency market in the middle of a significant shift in sentiment? With the majors pointing towards possible trend reversals and many of the liquid crosses already on their way, this seems to be a legitimate possibility. Few pairs can hope to avoid this broad market driver; but if any exchange rate can, it would be AUDNZD. From a fundamental standpoint, this pair mutes the influence of risk trends as it is comprised of two key high yielders. This should offer a considerable fundamental buffer for the pair – though there will still be the usual exposure to scheduled event risk and any intense swings in risk appetite. Looking at the technical set up, it is important to hold with the dominant trend – even if resistance seems more stable. We have lowered position size so that our stops can be placed below the next level’s swing low without leveraging the potential for notional losses. At the same time, this range is severely limited for room; and so our first target is already 50 percent of the zone while the second looks for the entire range (which lowers the probability of taking profit – especially within a reasonable time frame). On the other hand, considering the dominant trend is bullish, a break is more likely to support our positioning. We will cancel all open orders by Australia’s data flow on Wednesday.

Event Risk Australia And New Zealand

Australia – Against its more risk-sensitive counterparts, the Australian dollar is experiencing a hearty rally. This isn’t based on traditional fundamentals (as the economy has slowed just like its larger G10 counterparts) but more in risk appetite. A rebound in yield demand can be seen through many key currencies – particularly the US dollar and Japanese yen. For the Australian dollar, the perk in optimism has leveraged recent speculation that the central bank would take a more neutral stance on monetary policy after its most recent 100 basis point rate cut. However, a true turn in sentiment will take considerable effort across all asset classes that will likely take a large major fundamental driver. In the meantime, the scheduled docket will threaten immediate - if not short-lived - volatility. Business and consumer confidence are notable guides for growth, but true precedence is found in Wednesday’s labor data.

New Zealand – Like its Australian counter-part, the New Zealand dollar is taken direction and momentum from the level of risk trends behind the markets. However, this currency may prove more attuned to demand for return than its complement as the RBNZ maintains a slight yield advantage over the Aussie dollar and Governor Alan Bollard has explicitly stated his intention to slow the pace of any further rate reductions going forward. As for the more mundane economic calendar, there is enough event risk to present a potential problem for a range. The lagging government retail sales report for December (due Thursday) will be preceded by Tuesday’s electronic card sales for January. Add to that the threat of an impending release on home sales and the consumer may redefine the kiwi’s trend.

Data for February 10 – February 17			Data for February 10 – February 17
Date	Australian Economic Data		Date	New Zealand Economic Data
Feb 10	Westpac Consumer Confidence (FEB)		Feb 9-14	REINZ House Sales (JAN)
Feb 10	Investment Lending (DEC)		Feb 10	NZ Card Spending (JAN)
Feb 11	Employment Change (JAN)		Feb 12	Retail Sales (DEC)
Feb 11	NAB Business Confidence		Feb 15	Performance of Services (JAN)

 

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

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