Talking Points:
- NZD/USD appears to be trading between well-defined short term technical levels post “Brexit”
- Carney speech in London the focus today as “Brexit” related news are still the major focus for the time being
The NZD/USD is trading sideways as the pair continues to fluctuate in perceived indecision following the “Brexit” vote. The sentiment linked New Zealand Dollar saw a significant decline following the referendum, as the market turned to safety linked currencies such as the US Dollar and the Japanese Yen.
The pair has since traded in almost perfect tandem to risk assets, which turns our focus to possible shifts in sentiment following central bank commentary ahead. The BoE’s Governor Mark Carney speech in London today seems likely to be the main focus of the market, while the speech by Fed’s Bullard could provide some clarity on possible “Brexit” ramifications for the US.
Taking this into consideration, we look to find short term trading opportunities using the Grid Sight Index (GSI) indicator.
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In the days following the “Brexit” decision, it seems like economic indicators took the back stage and did not provide for significant price swings. It appears likely that short term implications of these indicators may be put to the side in this current trading environment, as risk trends take center stage in the aftermath of the “Brexit” decision. 7-day correlation between the NZD/USD and the SPX 500 currently stands at 93%.
In light of this, we will look for any potential swings to sentiment that could arise from the central bank commentary ahead.
BoE’s Carney will speak in London 15:00 GMT to members of the press and finance industry. The market seems poised to scrutinize the speech, which could shed light on possible near-term policy response from the BoE to the perceived chaotic situation that has unfolded since the “Brexit” vote. Carney might attempt to reassure the markets that the BoE has tools to handle any "Brexit" fallout, which in turn could potentially provide a lift to risk assets and thus boost the Kiwi. In this context, it will be interesting to see if/how Carney will address the central bank’s pre-Brexit forecasts for a possible negative turn to UK’s growth prospects.
St. Louis Fed President James Bullard is set to speak as well today. Bullard was the “lone dot” that has forecasted the Fed will only hike once this year and throughout the Fed’s forecast horizon. The market has since priced out any Fed hikes this year (as per Fed funds futures) in the aftermath of the “Brexit” vote. Bullard might help shed light on possible implications of the decision on the US economy and the rates path. In “normal” circumstances, a more dovish view might have been seen as supportive for stocks, but it remains to be seen if this is the case today.
NZD/USD 5-Min GSI Chart: June 30, 2016
The NZD/USD is seeing some positive momentum after correcting to the 0.7070 support (see chart below). The GSI indicator above shows that in 59% of similar past momentum patterns, the pair saw further positive momentum. The GSI indicator calculates the distribution of past event outcomes given certain momentum patterns, and can give you a look at the market in a way that's never been possible before, analyzing millions of historical prices in real time. By matching events in the past, GSI describes how often the price moved in a certain direction.
You can learn more about the GSI here.
NZD/USD Technical Levels:
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We use volatility measures as a way to better fit our strategy to market conditions. The current “quiet” period in the pair as opposed to higher probabilities of volatile reactions because of the “Brexit” situations might make for ripe condition for significant price swings should a catalyst present itself. With that said, price action has seen sideways movement since the vote, as the market appears to search for direction, which could imply that technical levels could hold, but caution is warranted.
NZD/USD 30-Min Chart with SPX 500 Overlay: June 30, 2016
The NZD/USD is trading higher after finding support around the 0.7070 level and is approaching what might be a resistance zone above 0.7150. Further levels of interest may be the 0.72 handle followed by what seems like a significant area of resistance above 0.7250.
Level of interest on a move lower could be the 0.7070 level, followed by a support area around 0.7040, and a zone below the 0.70 handle. A break below that zone might put the spotlight on the area below the 0.69 handle.
When price reaches those levels, short term traders might use the GSI to view how prices reacted in the past given a certain momentum pattern, and see the distribution of historical outcomes in which the price reversed or continued in the same direction. We generally want to see GSI with the historical patterns significantly shifted in one direction, which could potentially be used with a pre-determined bias as well.
A common way to use GSI is to help you fade tops and bottoms, and trade breakouts. That’s why traders may want to use the GSI indicator when price reaches those specific pre-determined levels, and fit a strategy that can offer a proper way to define risk. We studied over 43 million real trades and found that traders who do that were three times more likely to turn a profit. Read more on the “Traits of Successful Traders” research.
Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing thatabout 38.6% of traders are long the NZD/USD at the time of writing. Retail traders flipped net short June 1, and added to positions on the move higher. Short positions has been reduced since the pair hit a top at the aforementioned resistance zone above 0.7250. In turn, this could suggest further strength ahead for the pair (See the “Traits of Successful Traders” research).
You can find more info about the DailyFX SSI indicator here
--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com
To contact Oded Shimoni, e-mail oshimoni@dailyfx.com
