The wind may have died down behind the rally in risk appetite, but the market’s bias is still clear. For NZDUSD, this false sense of security is further unsettled by the US dollar’s own struggle for direction. So, while there is obvious congestion for this major and noteworthy resistance to work with; tempting a reversal is a highly speculative play.
[B]Why Would NZDUSD Hold a Range?[/B]
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 0.6600 (Double Top, Fib)[/B]
[B]-Range Bottom: 0.6240 (Trend, Fibs)[/B]
· Risk appetite has temporarily stalled; and the market has not yet made its decision for a sustained rise in optimism or meaningful pull back that takes a more cautious approach to growth forecasts. The kiwi dollar is highly sensitive to such trends; but measured against the safe haven dollar, the risk is made far more apparent. Though related to risk, the dollar’s direction is a problem all its own. Will a break be found before [Friday’s GDP data hits](http://www.dailyfx.com/story/strategy_pieces/watch_what_the_fed_watches/Dollar_on_The_Verge_of_1248303369919.html)?
[B][/B]
· It is not yet clear whether NZDUSD is consolidating before a breakout or making an exaggerated double top. We will not know which it is until after the fact. [Resistance is relatively loose](http://www.dailyfx.com/story/bio2/FX_Technical_Weekly_1248466920002.html) with the previous swing high at the psychologically significant 0.66 and a long-term 50% Fib in the same vicinity. What’s more, the markets bias since March is bullish.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Short:[/U] Half-size entry orders will be placed in the middle of the past week’s congestion at 0.6580.[/B][B][/B]
· [B][U]Stop:[/U] An initial stop of 0.6665 is set only to secure moderate tales above recent congestion. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B][B][/B]
· [U] [B]Target[/B][/U][B]: The first objective equals risk (85) at 0.6495 and the
second target is set to 0.6345[/B] [B]Trading Tip[/B][B] – The wind may have died down behind the rally in risk appetite, but the market’s bias is still clear. For NZDUSD, this false sense of security is further unsettled by the US dollar’s own struggle for direction. So, while there is obvious congestion for this major and noteworthy resistance to work with; tempting a reversal is a highly speculative play. There is a clear bullish bias behind the market and the trend that has carried the market is no doubt mature. Therefore, our strategy takes step to lower the potential for loss to account for the level of risk behind the market. The first thing to take under consideration is exposure. Existing positions that are similarly short risk would only be leveraged by taking this setup. Furthermore, position size should be cut in half or more to account for the speculative aspects of the position. For the levels themselves, the suggested stop looks only to cover recent congestion as a serious push above this range would likely signal a breakout. Timing should be another critical issue. This consolidation at the extreme of such prominent trends and ranges will encourage [speculative interests to eventually run the markets on their own.](http://www.dailyfx.com/story/trading_reports/dynamic_carry_trade_basket/Risk_Appetite_Soars__But_the_1248391305003.html) We will look to close all open orders by Thursday’s US open to avoid the likely volatility spurred through the GDP release and the calm before hand.[/B]
[B]Event Risk for New Zealand and US[/B]
[B]New Zealand – [/B]Over the past few months, the New Zealand dollar has taken a back seat to its Australian counterpart. Both are considered high-yielding, commodity export-reliant currencies. In turn, both have clear and stark correlations to risk appetite. However, there is a growing difference between the two in the health of their underlying economies and markets. The larger Australia was able to avoid recession through the first quarter, while seeing limited impact from the global financial crisis and small deficits. Alternatively, New Zealand is struggling to weather its own economic contraction and capital inflows have dried up as global wealth has shrunk and rates of return have fallen. This has a clear impact on the relative appeal of the two currencies; but perhaps not what you think. A general recovery in global activity and the return of speculative capital would benefit New Zealand in its current state more. This is one reason economic releases from the island nation will take on a greater prominence over the coming weeks. Trade, business confidence second quarter wages (employment beyond the one week mark) and the RBNZ rate decision will all hold significant price impact.
[B]
US – [/B]The US dollar is right on the cusp of major support after a steady decline over the past weeks and months. For fundamental traders, the immediate future will be defined through the question of whether the greenback has found itself at this point by way of economic considerations or risk flows. If the dollar is taking on a safe haven guise, the dollar will be tuned into the direction and activity levels of equities, commodities, fixed income and other major asset classes. In contrast, growth considerations are a relative game; and the United State’s future looks comparatively bright as a recovery takes hold and plans to work down ballooning deficits are already being contemplating. However, regardless of which catalyst the dollar takes, the US GDP reading on Friday will likely contribute.
[I]Questions? Comments? Send them to John at <[email protected]>.[/I]