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Active NZDCAD Short, CAD Strength to Retrace NZD's Q4 Run

Active NZDCAD Short, CAD Strength to Retrace NZD's Q4 Run

2019-01-08 18:25:00
Peter Hanks, Junior Analyst
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NZDCAD Active Short:

  • The Canadian Dollar enjoys a fundamental tailwind versus its New Zealand counterpart
  • A series of significant technical levels bolster the bullish CAD argument
  • However, a change in language from the Bank of Canada may expand my timeframe

New Zealand Dollar Likely to Soften in the Weeks Ahead

The Kiwi-Loonie cross enjoyed a significant climb last quarter but rising crude prices and a weakening NZD could look to retrace the move. More broadly, the Kiwi rallied against all crosses. This move has since been fully undone for NZDJPY after the Yen rallied alongside a USDJPY flash crash.

NZDJPY Price Chart 4-Hour, October 2018 – January 2019 (Chart 1)

NZDJPY price chart for 2019

While the pair is fundamentally and technically different from NZDCAD, I do believe it can serve as a bellwether for a larger retracement by the Kiwi against other pairs, but to a lesser degree. With that in mind, I believe the Canadian Dollar is a perfect candidate for the long-side of the trade.

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Recently rising crude oil prices have bolstered the Canadian Dollar. Further, Canada’s adoption of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on January 1st, could bolster Canadian trade data.

At the same time, the Bank of Canada has been more hawkish than the Reserve Bank of New Zealand. But at the BOC rate decision on January 9th, central bank officials struck a more dovish tone. While the tone was widely expected, some economic growth projections may have been lower than expected. While the shift may weaken the immediate case for a bullish Canadian Dollar, I believe the foundation for the trade remains firm over the next few weeks.

NZDCAD Price Chart Daily, November 2016 – January 2019 (Chart 2)

Active NZDCAD Short, CAD Strength to Retrace NZD's Q4 Run

Technical Backdrop Bolsters Bearish Case

The technical landscape of the cross may be the most encouraging argument. To the topside rests trendline resistance from late 2016. This line is unbroken since its inception and is an encouraging signal for a bearish argument.

A minor psychological level at 0.9000 is also to the topside and provided moderate support for the pair last week. The level will now act as resistance in the coming days. Further, a smaller resistance level lies at the bottom of the recent range and is the second line of defense for a sustained climb. That said, I have set a stop near this lower bound.

NZDCAD Price Chart 1-Hour, November 2018 – January 2019 (Chart 3)

nzdcad price chart for short after bank of canada rate decision

To the bottom side, 38.2% Fibonacci retracement is the first level of support. This line will be first to go on a bearish development. At the time of this article’s publication, the pair trades marginally higher than the level after a previous break below. A sustained break below the pair would be an encouraging sign for the trade and a close below would then see the 38.2%-line act as resistance moving forward.

Key Price Levels

Price levels to be cognizant of rest near the 0.8700 area. I believe this zone will provide some moderate support, offering an opportunity to re-evaluate the trade if they are reached. My position is currently active, entered near 0.9000. Live updates will be provided on my Twitter @PeterHanksFX.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

DailyFX forecasts on a variety of currencies such as the US Dollar or the Yen are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

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