pairs to range trade

Technicals Buffer A Fundamentally Stable AUDNZD Range

Friday, 09 January 2009 21:50:22 GMT  |  John Kicklighter, Currency Strategist

 A relatively volatile week has ended, yet the broader market has not taken up trend on risk sentiment. This remains one of the greatest fundamental threats to range conditions in the currency market, but not necessarily for AUDNZD.

Why Would AUDNZD Hold a Range?   ·         Levels to Watch: -Range Top:       1.2215 (Range High, Trend) -Range Bottom: 1.1785 (Trend, Fibs, SMA)   ·         Is risk appetite going to rally or plunge next week? This is a question that has constantly plagued fundamental traders over the past six months. However, with AUDNZD, this concern is relatively minor to the pair’s overall direction. Comprised of the G10’s top two yielding currencies, this pair has a buffer to the lingering correlation between carry and risk trends. However, there is still scheduled event risk to deal with, a particular problem for AUD.   ·         While fundamentals may hold off on exacting their influence on price action, it will be the technicals that truly hold back the tides in the market. There is modest breakout pressure behind this pair with an ascending wedge developing over the past months. Support is the immediate concern with a Fib confluence, 50-day SMA and trendline at 1.1765/85.   Suggested Strategy   ·         Long: Entry orders will be set at 1.1915 which is generous for the natural spread on the pair.   ·         Stop: An initial stop at 1.1840 is well below technical congestion, but won’t hold large tails. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (75) at 1.1990. The second target will be 1.2090.

Trading Tip – A relatively volatile week has ended, yet the broader market has not taken up trend on risk sentiment. This remains one of the greatest fundamental threats to range conditions in the currency market, but not necessarily for AUDNZD. In the past months, as global interest rates have tumbled, we have seen that both the Australian and New Zealand dollars’ have retained their relative interest rate advantage over their G10 contemporaries. This has imparted both with a distinct sensitive to risk appetite; but when paired, this pull is largely balanced out. This is a significant benefit to have when the rest of the currency market is suffering from high volatility and this large burden lingering. AUDNZD is not a sure bet though. An exaggerated double top earlier in the week has built bearish momentum. Also, with around 400 points of room to move (and closing thanks to the wedge), a breakout is closing in. However, if unforeseen surprises through event risk hold off, technicals could hold the market back for another range swing. Certainly the collection of a number of Fib retracements, a 50-day SMA and rising trendline from the November lows offers significant stopping power. Our strategy looks to keep with this confluence, but it may not survive wide tails to test the late December congestion floor (which would likely institute a trend change anyway). As spot is actually below our entry, we will cancel any open orders by Monday’s close.

Event Risk Australia And New Zealand

Australia – Of the two economic dockets, the Australian calendar is certainly the true concern for event-driven breakouts next week. Though populated with only a few notable pieces of data, they are significant market movers that could force a breakout if volatility is supporting the release. The first round of data doesn’t come out until Wednesday morning with the lending data. Investment and home loan numbers, as well total value of loans is an important collection of data to objectively measure the health of the economy (spending is essentially activity) and credit availability. The top market mover, however, is the following day’s employment report. With economic growth acting as the key gauge for fundamental currency trading going forward, this gauge will set the benchmark for Australia. After that, the NAB 4Q business confidence number and TD inflation hold less sway, though a confirmed day for the sentiment release could leverage the indicator’s appeal.

New Zealand – Event risk finally returns to the New Zealand calendar next week – though the offerings are relatively sparse. The top mover for the entire period, actually also happens to be the first. The NZIER business leader sentiment report for the final quarter of 2008 will set the tone for activity expectations going into the first part of the new year. A slip here could thwart any hopes for rebounds in employment, investment and credit. For the rest of the week, housing data takes the stage. Building permits through November and QV housing inflation numbers for the following month will gauge levels of consumer wealth – and thereby confidence.

Data for January 11 – January 18			Data for January 11 – January 18
Date	Australian Economic Data		Date	New Zealand Economic Data
Jan 13	Value of Loans (NOV)		Jan 12	NZIER Business Opinion Survey (4Q)
Jan 13	Investment Lending (NOV)		Jan 13	Building Permits (NOV)
Jan 14	Employment Change (DEC)		Jan 15	QV House Prices (DEC)
Jan 14-30	NAB Business Confidence (4Q)
Jan 18	TD Securities Inflation (DEC)

 

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

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