We are in the eye of a fundamental storm; and all currency pairs are still exposed to what could end up as the most influential piece of event risk this week: the results from (and more importantly reaction to) the Fed’s Stress Test. From a safety point of view AUDNZD is a gamble. While this pair is buffered somewhat to shifts in market-wide sentiment, there is still a ‘safe’ and ‘risky’ component among the two.
Why Would AUDNZD Hold a Range?
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.2940 (Triple Top)[/B]
[B]-Range Bottom: 1.2700 (Trend, Fibs, SMA)[/B]
· The natural buffer to risk appetite AUDNZD retains through its composition of two high yielding currencies has helped key technical levels tame swells in volatility. However, this pair is certainly not immune to further shocks. The Fed bank Stress Test is the primary concern from broader market; but there is also national event risk to keep an eye on. Later tonight, the RBA will release its quarterly policy statement – a high risk market mover.
[B][/B]
· The boundaries of congestion are clear for AUDNZD. Support is defined by a number of Fibs, notable 50-bar SMA (on the 8 hr frequency chart) and rising trend all falling around 1.27. On the opposite side of the market, we have a long-term an eight-month long triple top. Considering the clash of so many trends though, a breakout is almost certain.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Long[/U][/B][B]: Half sized entry orders will be placed at 1.2710 to offer a strong risk/reward position.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 1.2650 is notionally tight and covers our primary technical pattern. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (60) at 1.2770 and the second[/B][B] target will be 1.2900. [/B]
[B]Trading Tip [/B]– We are in the eye of a fundamental storm; and all currency pairs are still exposed to what could end up as the most influential piece of event risk this week: the results from (and more importantly reaction to) the Fed’s Stress Test. From a safety point of view AUDNZD is a gamble. While this pair is buffered somewhat to shifts in market-wide sentiment, there is still a ‘safe’ and ‘risky’ component among the two. As such, a major shift in the market’s recent optimism could dramatically influence price action. What’s more, there is also the RBA’s quarterly policy statement, which may prove to be the delayed driver to this week’s rate decision. Regardless of whether we see a thrust in the next few hours or next week, a breakout is inevitable. Since peaking last week, this pair has carved a consistent yet gradual descending trend channel. Recently, this pattern has come into conflict with the support in a rising trend channel that began with the April 6th bullish reversal. To top that off, we have the clear and spread out triple top near 1.2950 (eight months in the making). Timing is important. Our strategy falls in line with the prevailing momentum (long). We will wait until after the initial reaction to the Stress Test results to place our entry orders. We have cut the size in half which makes for very low notional risk. Our first target is easily within reach. The second is further away but does not record a major breakout. We will cancel all open orders before Friday’s close or should spot hit 1.2650 or 1.2875 before we are entered.
Event Risk for Australia and New Zealand
Australia – Event risk may trump the Australian dollar’s correlation to shifts in sentiment for the remainder of the week. On deck, we have the Fed’s Stress Test. This will no doubt show many of the United States 19 largest banks would not be able to weather an ongoing recession (according to the government’s accounting rules and scenarios). However, it is hard to tell how the market will respond considering so much of the data has been leaked and traders have tempered their expectations. Looking beyond this vague threat, we further see significant data and reports scheduled for release from the Aussie docket. The RBA quarterly policy statement is the greatest threat. This statement will offer forecasts for growth and financial health and may hint at un-conventional policy down the line. After that, we have second tier indicators like the NAB survey, investment levels and consumer confidence report.
New Zealand– Like its Australian counterpart, the New Zealand dollar will be tuned into the waves created by the Fed Stress Test. With an interest rate that is still heading lower and a domestic recession that is made all the worse by a lack of investment capital flowing into the nation’s coffers; this island nation will be highly susceptible to a wave of risk aversion. As for domestic economic indicators, there are a few notables; but they are all due after the weekend. The March retail sales report (that subsequently rounds out the first quarter figure) will be the most market moving as a gauge for domestic economic health.
[B]Data for May 8 – May 15[/B]
[B][/B]
[B]Data for May 8 – May 15[/B]
[B]Date (GMT)[/B]
[B]Australian Economic Data[/B]
[B][/B]
[B]Date (GMT)[/B]
[B]New Zealand[/B][B] Economic Data[/B]
May 7
RBA Quarterly Monetary Policy Statement
[B][/B]
May 10
QV House Prices (APR)
May 10
NAB Business Confidence (APR)
[B][/B]
May 10
Electronic Card Spending (APR)
May 11
Investment Lending (MAR)
[B][/B]
May 14
Retail Sales (MAR)
May 12
Westpac Consumer Confidence (MAY)
[B][/B]
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>.