Risk appetite has marked a sharp rally over the past 12 hours and yet currencies haven’t followed through on this change in current. For range traders, this situation is equivalent to dealing with an unexploded bomb. It is best to steer well clear of such conditions. For those that are extraordinarily comfortable risk and want to trade the many currency pairs at the extremes of their respective congestion zones; they should do so with extreme caution, reduced size and nearby stops and objectives.
[B]Why Would AUDNZD Hold a Range?[/B]
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 1.2475 (Fib, Pivot, Range Zone)[/B]
[B]-Range Bottom: 1.2350 (Fib, Trend, Range Zone)[/B]
· For all intents and purposes, risk appetite has jumped to the next bullish level. Equities, commodities and fixed income yields have all pushed sharply higher through today’s sessions. However, currencies have yet to follow through. This is unusual and leverages significant risk in late, widespread breakouts for the dollar, yen and many other currencies and pairs. AUDNZD dampens this risk somewhat - but not nearly enough.
[B][/B]
· The range is AUDNZD is clear and consistent. Two weeks of constant chop between 1.2475 and 1.2350 has produced daily opportunities for short-term reversals. At the same time, volatility remains extraordinarily high. Considering the typical pace of activity this pair usually runs, it seems clear that such a tight zone of price action can’t last.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Long:[/U][/B][B] Half-size entry orders will be placed at 1.2375, which is within today’s range.[/B]
· [B][U]Stop: [/U]An initial stop of 1.2315 is well below the lowest market levels in three months. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B][B][/B]
· [B][U]Target: [/U]The first objective equals risk (60) at 1.2435 and the
second target is set to 1.2465. [/B] [B]Trading Tip[/B][B] – Risk appetite has marked a sharp rally over the past 12 hours and yet currencies haven’t followed through on this change in current. For range traders, this situation is equivalent to dealing with an unexploded bomb. It is best to steer well clear of such conditions. For those that are extraordinarily comfortable risk and want to trade the many currency pairs at the extremes of their respective congestion zones; they should do so with extreme caution, reduced size and nearby stops and objectives. For our AUDNZD setup, we are practicing all three. This pair has turned to congestion long before the broader market turned to consolidation. This has produced more than two weeks of back and forth that has been ideal for very, short-term range trading. Using a half-sized position, our notional risk on an already tight stop is low. Just as important to the strategy is the aggressive entry and nearby targets. If we are entered, it is a good probability that we could take profit in the same session. Since this is such a consistent setup, it is also possible to take a position from the opposite side of the range (with an entry near 1.2455 and having stops and targets at similar distances). While this may be a pair that has greater stability than the standard pair due to its composition of two high yielders, the risk of a breakout is still very high. All open orders will be canceled before the UK GDP numbers cross the wires in the European session. [/B]
[B]Event Risk for Australia and New Zealand[/B]
[B]Australia[/B] – Over the coming week, the Australian docket will fill out. For the time frame we have set out for our position, the docket is relatively clear. Realistically, broader market sentiment will likely take the lead on the price action going forward. More traditional asset classes have shown a very clear and amplified correlation to risk appetite which has produced multi-month highs and notable breakouts. For the Australian dollar, with its high benchmark lending rate and comparatively bullish forecasts for growth, the exposure to shifts in investor sentiment is clear. Going forward, the docket may once again find guidance from more mundane sources of price action. Early next week, a business confidence survey for the second quarter and leading composite index for May will offer leading forecasts for growth and market activity. On the same day, a speech by RBA Governor Stevens will be monitored closely for any clues that the recent neutral stance on monetary policy could shift.
[B]New Zealand [/B]– Like its Australian counterpart, the kiwi dollar is taking its guidance from risk appetite. However, it seems the low yielding yen and US dollar are more active than their high interest rate counterparts. This has had a demonstrable dampening effect on those kiwi dollar crosses that are not denominated in safe haven currencies. Looking out over the coming week, this may change. After the weekend, economic interest picks up behind the New Zealand currency; and the result may be another significant shift in rate and growth forecasts. The trade balance and business confidence reports for June and July respectively will work with growth specifically. The RBNZ rate decision however has implications for both growth and monetary policy – the two vital statistics for this currency.
[I]Questions? Comments? Send them to John at <[email protected]>.[/I]