AUDNZD Might Have Reached the Extreme of Its Range

Seeing as how both the Australian and New Zealand dollars are considered the high-yield currencies among the majors, there is some level of buffer to violent swings in risk appetite. Nonetheless, the slow trends that this pair takes over time reveals there is a bias for which currency is considered to be positioned for the greatest increase in yield with time – and that prejudice currently falls in the kiwi’s favor.

[B]How Stable is the AUDNZD Range?[/B][B]

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         ·         [B][U]Levels to Watch:[/U][/B]

         [B]-Range Top:       1.2340 (Fibs, Pivot)[/B]

         [B]-Range Bottom: 1.2020 (Fib, Double Bottom)[/B]

         

         ·         The sudden surge in the kiwi dollar overnight was almost exclusively due to [the better than expected performance of the New Zealand economy](http://www.dailyfx.com/story/market_alerts/fundamental_alert/New_Zealand_Dollar_Surges_as_1253672526991.html) through the second quarter. A return to growth has added a new, hawkish facet to interest rate speculation surrounding the RBNZ after Governor Bollard warned he would hold rates until late 2010. This could certainly move up the time table for a recovery; but not soon enough to outpace the RBA.

         [B][/B]

         ·         A broad view of AUDNZD price action puts the congestion this pair has wrought over the past nine months into perspective. However, there have been gradual biases that have developed behind this price action. Now in a measured, bearish trend; we have come to the bottom of a five-month trend channel and Fib/pivot confluence around 1.2020/50.

         

         [B][I]Suggested Strategy[/I][/B]

         [B][/B]

         ·         [B][U]Long[/U][/B][B]: Wide tails have been recorded in the area of support; so a 1.2050 entry is aggressive.[/B]

         ·         [B][U]Stop[/U][/B][B]: The same volatility taken into account for our entry means a stop of 1.1980 is necessary. 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 [/B][B]is one and a half times initial risk (105) at 1.2155. The second is 1.2225. [/B]

                         [B]Trading Ti[/B][B]p[/B] – Seeing as how both the Australian and New Zealand dollars are considered the high-yield currencies among the majors, there is some level of buffer to violent swings in risk appetite. Nonetheless, the slow trends that this pair takes over time reveals there is a bias for which currency is considered to be positioned for the greatest increase in yield with time – and that prejudice currently falls in the kiwi’s favor. It is important to recognize that risk appetite (and this pair’s correlation to this underlying driver) will not disappear. Therefore, our setup has to take this reality into account. In establishing support, we are fundamentally accounting for a rally in the kiwi’s favor that has been founded on speculation for a time table for rate hikes from the RBNZ; but the reality is that the RBA holds a premium over its counterpart and is still far more hawkish in their disposition. As for the position, we have recently formed what could be a double bottom with the April lows around 1.2050/20 that is further established through a long-term Fibonacci retracement and as the bottom of a prominent trend channel. Our stop is purposefully wide as reversals can be extended before finally correcting. Timing is also a factor. A reversal should occur relatively quickly; so if we are not entered by tomorrow, we will cancel all open positions.  

[B]Event Risk for the Australia and New Zealand[/B]
[B]
Australia[/B] – Bullish sentiment behind the Australian dollar has been dampened by the Reserve Bank of Australia’s efforts to temper its forecast – which is then interpreted by speculators as its rate bias – over recent months. The Australian economy has been able to avoid the black mark of economic recession; and naturally, a yield-hungry market expects the economy to front run the broader recovery. However, the central bank has echoed the same concern that its counterparts the world over have noted: that the global growth going forward will be restrained and uneven. If it were the case that the world-wide recovery were ‘V’ shaped, the impact on exports and demand for yield would send Australia ahead of the pack; but a strained rebound will more likely moderate growth potential for the land down under as it slowly bolsters those that suffered significant recessions. This is the concern to be kept in mind with the round of official commentary due over the coming week. The RBA will release its Financial Stability Review tomorrow and next week we will see both the central bank and Treasury represented at the Senate.
[B]
New Zealand[/B] – An unexpected return to growth has revived the kiwi dollar’s status as a high yield currency in a market that is flooded with historically low rates of return. RBNZ Governor Alan Bollard has made it known that he would keep the nation’s benchmark lending rate unchanged at its extraordinarily low rate until ‘late 2010,’ but market participants will look for any revisions to this gloomy outlook now that the economy is actually expanding. Aside from vague consideration, fundamental traders will have event risk to contend with as well. Before the weekend, we will see both the 3Q consumer confidence survey from Westpac and the August trade balance results. Next week holds mostly second tier releases like building permits and the NBNZ Business sentiment survey data.

                                               [B]Data for September 24 – October 1[/B]

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                                   [B]Data for September 24 – October 1[/B]

                                                     [B]Date (GMT)[/B]

                                   [B]Australian Economic Data[/B]

                                   [B][/B]

                                   [B]Date (GMT)[/B]

                                   [B]New Zealand Economic Data[/B]

                                                     Sep 24

                                   RBA Financial Stability Review

                                   [B][/B]

                                   Sep 23

                                   Westpac Consumer Confidence (3Q)

                                                     Sep 27

                                   RBA Gov. Stevens Speaks to Senate

                                   [B][/B]

                                   Sep 24

                                   Trade Balance (AUG)

                                                     Sep 28

                                   Treasury’s Henry Speaks to Senate

                                   [B][/B]

                                   Sep 28

                                   Building Permits (AUG)

                                                     Sep 30

                                   Retail Sales (AUG)

                                   [B][/B]

                                   Sep 29

                                   NBNZ Business Confidence (SEP)

[I]Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? You can send them to John at <[email protected]>. [/I]