The past 24 hours have seen considerable volatility; yet most of the tension behind potential breakouts has yet to dissipate. This leaves many risk-sensitive crosses threatening significant reversals and a market floating enough price action to finally catalyze a move.
Why Would GBPNZD Hold a Range?
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 2.6175 (Range High, Fib)[/B]
[B]-Range Bottom: 2.4875 (Range Low, Trend)[/B]
· Risk appetite has a clear and established influence over market sentiment; but each asset responds differently to the rise and fall in optimism. For GBPNZD, the reaction to a strong move in sentiment one way or the other is dampened by the fact that both the pound and kiwi dollar are both on the high end of the risk spectrum. Both are known to have volatile yields that are often high. Also, each is currently suffering a severe recession.
· Whether looking at a high- or low-frequency chart, we can see congestion in GBPNZD price action. Our primary interest is in the broad range between 2.6150 and 2.49. There has been more activity in the upper half of this range over the past four months; but support is clearly defined by a number of independent swing lows and a rising trend.
· [B][U]Short[/U][/B][B]: Half-size (or smaller) orders will be placed below today's low at 2.4965.[/B]
· [B][U]Stop[/U][/B][B]: With a frequented range low, a tight stop of 2.4765 should cover most normal reversals. 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 (200) at 2.5165 and the second[/B][B] target is set to 2.5900. [/B]
[B]Trading Tip [/B][B]– The past 24 hours have seen considerable volatility; yet most of the tension behind potential breakouts has yet to dissipate. This leaves many risk-sensitive crosses threatening significant reversals and a market floating enough price action to finally catalyze a move. Once again, on watch for a major shift, range traders should remain on the sidelines or look for those pairs that have a significant buffer to the prevailing fundamental winds. GBPNZD is a pair that seems to fit the bill. Both the pound and kiwi dollar are considered high-risk currencies that both respond positively when the outlook for the global economy improves and vice versa. This has clearly helped to stabilize price action though many of the high-volatility moves of the past few months. However, GBPNZD comes with its own issues. Congestion is a common state of being for this pair; but this back and forth can often overwhelm obvious technical boundaries. This raises the risk of a tighter range developing near our target support that blurs an otherwise clear level. A related issue is timing and projections. We have seen a test of support or resistance in the past turn to weeks of tight chop. We need to be prepared to exit a position if price action does not develop as it should. Therefore, we will cancel all open positions by Monday’s close and close any non-performing open positions by the end of next week. However, our first target is close enough that it could be hit relatively quickly. [/B]
Event Risk for UK and New Zealand
UK – The Bank of England squashed speculation that the United Kingdom is trailing its Euro Zone counterpart to a timely, economic recovery and quick return of a hawkish rate regime. Coming not long after the first reading of 2Q GDP reported a greater than expected expansion of its recession, the MPC surprised the markets by expanding its quantitative easing program by 50 billion pounds. The commentary that accompanied the decision was similarly dovish – suggesting the loose monetary policy and painful economic contraction would last longer than many had anticipated. Going forward, the pound is left to drift without a clear bearing on its relation to risk. Economic indicators may help tighten the link; but few can reestablish it on its own. The most influential piece of event risk over the coming week will be next Wednesday’s Quarterly Inflation Report from the BoE. This name is a misnomer. This report goes beyond inflation to encompass growth and lending conditions. Less vital to the primary trend – but volatility drivers nonetheless – is the labor data, trade balance, producer level inflation and the proprietary BRC retail sales report.
New Zealand– Few majors are suffering the same level of economic recession that New Zealand is. However, through the slump of consumer spending and taxed exports, the kiwi still retains its global appeal as an investment currency. This has kept traders attention on the general health of investor sentiment as well as the forecast for keeping benchmark yields steady long enough for a hawkish regime to come back into play. The former theme is difficult to link to any specific event or data; but the outlook for rates can be altered by data due over the coming week. Second quarter retail sales, housing and business activity offers a good overview.