AUD/NZD May Rise More After Dovish RBNZ & Neutral RBA, Now Long

2018-08-09 01:32:00 Daniel Dubrovsky, Contributing Senior Strategist

AUD/NZD Trading Strategy: Long at 1.1083

Dovish RBNZ and neutral RBA fundamentally presents attractive long AUD/NZD setup
Earlier reversal warning signs passed, opening the door to test the October 2017 high
We entered long AUD/NZD at 1.1083 targeting that, exit is a daily close under 1.0980

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Previously, we remained patient before entering long AUD/NZD amidst several warnings that the pair could head lower. Those have now past and the fundamental backdrop seems to still favor Australian Dollar gains against its New Zealand counterpart. Using a four-hour chart to fine tune this new setup, we entered long at 1.1083 targeting the October 2017 high.

AUD/NZD Fundamental Long Argument

This week we have had two critical relevant event risk for both currencies. First, the RBA rate decision passed without much fireworks on Tuesday. The central bank left rates unchanged, maintaining that they are where they need to be for achieving sustainable economic growth and the inflation target over time. At the moment, overnight index swaps are pricing in a better-than-even chance that they could raise rates in August 2019.

Then, a relatively dovish RBNZ monetary policy announcement crossed the wires during early Asia trade on Thursday. Like the RBA, the central bank left rates unchanged. However, what set it apart from Australia was that it forecasted raising rates further out. Suddenly, hopes of a rate hike in 2019 were evaporated as local front-end government bond yields tumbled.

With that in mind, this could mean that the Reserve Bank of Australia may actually begin policy tightening ahead of its New Zealand counterpart. From a yield perspective, this bodes well for AUD and negative for NZD. In addition, even positive economic news flow out of New Zealand for the time being may not offer much of a lift for its local currency as it could have limited implications for RBNZ rate hike bets.

AUD/NZD Technical Analysis and Long Setup

Taking this into account, we may see AUD/NZD ascend in the near-term which opens the door for an attractive buying opportunity if the technical side of things bode well. Given that the recent reversal warnings are now behind us and that we are heading above the November 2017 trend line (after consolidating around it), this seems to be the case.

Before considering a target for this trade, it is important to first evaluate an exit. Using the four-hour chart above, a stop could be used once we get below the near-term rising support line. But, confirmation will be needed to argue that the pair may be heading lower. This might be the case if we get a daily close below the lows set around 1.0980 both on the 4-hour and daily chart.

As mentioned earlier, the target of this trade will be the October 2017 high around 1.1288. In order to have a risk-reward ratio of at least 2-to-1, 1.1083 was used as the entry point. This trade will be closely monitored for reversal warnings signs. In addition, AUD/NZD may at times temporarily fall under the near-term rising line. However, a lasting reversal may not occur until we get below 1.0841 (the July lows).