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Why the New Zealand Dollar May be More Tradeable Than USD Next Week

Why the New Zealand Dollar May be More Tradeable Than USD Next Week

2018-03-17 01:40:00
John Kicklighter, Chief Strategist
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Talking Points:

  • An overwhelming amount of high level event risk is scheduled through the upcoming week
  • When there are too many different possibly catalysts or events competing to drive a market, volatile indecision is more likely
  • The US Dollar is at the center of the most prominent event risk ahead, while the New Zealand Dollar's path is far more refined

With NZD/USD quickly approaching a range support, how are retail FX traders positioning - for break or reversal? See how these market participants are positioned using the DailyFX positioning data.

Event Risk Provides Drive, But Not Explicitly Productive Drive

Many traders seek out as much volatility and event risk as possible. In both cases, they are looking for amplitude that they believe can hasten returns and make the end profits significantly larger. Yet, this type of leverage does not improve our ability to select good trades. It instead makes the outlook more complicated and uncertain while making those erratic outcomes unfold far more quickly. This is the type of environment we have to be mindful of for much of the financial system over the coming week. There are high level events like the European Union and G20 summits as well as the planned expiration of the US tariffs' grace period. While there is much more to keep track of for global traders, the connection these have to trade wars make them the most fundamentally loaded. For traders looking for higher probability trade scenarios, avoiding these points of volatility and uncertainty is crucial

Why the New Zealand Dollar May be More Tradeable Than USD Next Week

The Problem with the Dollar

If you are looking to wade into the very middle of this coming week's volatility, the US Dollar will find itself at the epicenter of these overlapping catalysts. The United States is due implement its tariffs on imported steel and aluminum at the end of the week, and much rides on how many or few exemptions are offered. This may seem a risk to those in the crosshairs of this import tax, but it is the Dollar that stands to lose the most as US's trade partners have shown they are ready to retaliate and a willingness to coordinate. And, that is why the gathering of leaders of the G20 and the European Union will also hold considerable weight for the Greenback. Add to that more discrete event risk such as the Wednesday FOMC rate decision and this currency faces risk of volatility from the very start to end of the week. This is not a currency that one can trade with confidence.

Why the New Zealand Dollar May be More Tradeable Than USD Next Week

The Benefit to the Kiwi Dollar

If we were looking for the exact opposite circumstances that the Dollar faces, we wouldn't exactly find ideal conditions. The antithesis of the overwhelmed Dollar would be the absolute open fundamental backdrop of the Swiss Franc. This currency offered up an interesting technical development these past few weeks, but it was a move that was purely the product of cross currency winds and speculative interest. It was also a limited engagement and is now again left adrift. Reducing conflict but maintain some degree of motivation is the happy medium. For that, we have the New Zealand Dollar. The currency has traced out some remarkable swings over the past months and years, though its traditional motivations have faded. Risk trends no longer control this market as is evidence in the lack of correlation between an equally-weighted NZD index and the S&P 500. We do have a scheduled event risk however - and only one at that - in the form of the RBNZ rate decision. This is an uneven opportunity for charge as dovish is assumed and ineffective for market movement while hawkish would catch the market off guard and require repositioning.

Why the New Zealand Dollar May be More Tradeable Than USD Next Week

Have Options - Bullish and Bearish Kiwi Pairs

If we have a currency with a predisposition to significant swings and a singular, important event; we can establish options for different outcomes. A bearish outlook would likely develop with a status quo RBNZ. While it wouldn't provide much momentum, it could allow the Kiwi to extend its slide from this past week. Options for such a course are better served by pairs with scenarios that don't target outsized moves or require critical breaks. With that said, NZD/CAD is perhaps the best suited with a consistent channel and over-extended one-sided move to retrace. If there is enough drive in the Kiwi's slide though, NZD/JPY and NZD/USD are facing remarkable support which can open the way to broader ranges. Alternatively, a bullish outcome would likely draw a stronger drive as it would play out as a correction and could come from an unexpected shift from the central bank. In that capacity, strong range rebounds from NZD/USD and NZD/JPY would be ideal; but EUR/NZD forcing a trend break could also be a remarkable escalation. We discuss the merits of trading the Kiwi versus the US Dollar next week in this weekend Quick Take Video.

Why the New Zealand Dollar May be More Tradeable Than USD Next Week

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