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NZD/USD Channel Holds Despite Broader Volatility

NZD/USD Channel Holds Despite Broader Volatility

2010-05-10 21:01:00
John Rivera, Currency Analyst




• Levels to Watch:
-Range Top:       0.7355 (Trend, Pivot)
-Range Bottom: 0.7070 (Trend, Pivot)

The New Zealand dollar showed the most resiliency amongst risk sensitive currencies to the broader flight to safety. A sharp drop in the country’s unemployment rate to 6.0% from 7.1% raised the outlook for interest rates and limited downside risks. The pair held to its current ascending channel which gives the formation’s bounds additional validity as potential barriers. The dollar continues to serve as a funding currency but that may end as its interest rate expectations start to rise, increasing the chances that the NZD/USD stays within its current channel.

• An established declining channel has provided solid levels to target for entering and exiting positions. The upper bound is defined by connecting the 2/16, 3/17, and 5/3 highs. The lower bound isn’t as defined, but connecting the 3/5 and 4/6 lows provide us with a solid level to target.

Suggested Strategy

• Short: Place an entry at 0.7360 above the upper bound
• Stop: Set the stop to 0.7460-100 pips in risk
• Target: The first target is 0.7166-20-Day SMA 

Trading Tip – The current volatility in the market has left us with very little discernable patterns amongst major pairs and few candidates for which to execute a range strategy. Therefore, we are targeting the one pair that has remained within the bounds of its longer-term pattern in the NZD/USD. Unfortunately, today’s pull back has left the pair in the middle of the formation and us waiting for price action to bring our set-up in play. Given the prevailing outlook for RBNZ interest rates we will look for another bullish thrust to test the upper bound. However, a return of broader concerns may limit the potential follow through and leave the pair vulnerable to a reversal and a re-test of the lower bound. The next policy decision for the central bank isn’t until June 9th which could leave the NZD/USD within its current ascending channel until then.

Event Risk for New Zealand & U.S.

New Zealand – Manufacturing and consumer consumption data highlight the upcoming economic calendar for the “kiwi”. Forecasts are for retail sales to have improved by 1.1% in April. An upside surprise is a possibility considering the strength of the labor market. Surging domestic growth could put upward pressure on prices which would pave the way for a RBNZ rate hike. Increases in the costs for food and houses would also feed into the improving outlook for yields and their upcoming releases should also be monitored.

U.S. – Similarly, U.S. retail sales data will be the major event risk for the greenback with forecasts for a 0.5% increase. The Fed continues to point toward keeping rates on hold for an extended period but improving domestic growth could shorten the horizon for a rate hike and provide dollar support. Export and employment data before hand will have potential to generate short-term volatility as demand for abroad has driven the current recovery and a decline in the level of unemployed is needed before policy makers can justify a tightening policy.

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