After days of extraordinary volatility, the currency market is looking to close the week without backing off of the momentum that put most currency pairs into some form of trend. Clearly, such conditions are as inhospitable for range trading as they can get. This is particularly true for EURNZD, which is highly susceptible to shifts in risk appetite.
Why Would AUDNZD Hold a Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 2.3550 (Triple Top)[/B]
[B]-Range Bottom: 2.2450 (Triple Btm, Fib, Trend)[/B]
· There is a lot to be concerned with when it comes to fundamental risk surrounding EURNZD; but our primary concern will be the market’s hypersensitivity to risk trends. There is momentum behind yield appetite; but whether this move lasts or not will be a factor of other fundamentals to cross the wires. From the economic dockets, there is plenty of fuel to catalyze a breakout. The most market moving data however will be the European growth numbers.
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· There are larger technical levels at play; but momentum is firmly heading in one direction – against our strategy. Support is developed on the confluence of a triple bottom that has taken the whole year to form, a 14-month rising trendline and the 38.2% Fib retracement of the entire financial crisis (July 2007 to February 2009)
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: Quarter sized entry orders will be placed at 2.2525 for an aggressive start.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 2.2325 is wide enough to cover our techs but not yesterday’s lows. 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 2.2725 and the second[/B][B] target will be 2.3025. [/B]
[B]Trading Tip[/B] – After days of extraordinary volatility, the currency market is looking to close the week without backing off of the momentum that put most currency pairs into some form of trend. Clearly, such conditions are as inhospitable for range trading as they can get. This is particularly true for EURNZD, which is highly susceptible to shifts in risk appetite. This pair is looking to close its sixth consecutive daily decline. Ending the week above 2.25, we will see the Monday open with either a confirmation of momentum (and a revived trend) or the beginnings of a reversal (at least a temporary one). This is a speculative take on the market - especially after the weekend. Our strategy is only for those very comfortable with risk. With a stop set 200 points wide, we will reduce the orders to at least a quarter of our normal size to lower notional risk. This buffer does not cover yesterday’s spike low; but there are few scheduled indicators that could promise that kind of volatility until next Friday. A first target equal to risk is easily within reach given the market’s average range. And, as this is a highly risky trade, we will wait to place orders until after we confirm that there is no opening adjustment after the weekend. What’s more, we will cancel all open orders by Tuesday’s US session as this position should setup and play out quickly. Also, we should always consider the opposite scenario. If we do see a confirmed break, it could signal a strong continuation move.
Event Risk for Euro Zone and New Zealand
Euro Zone – Over the past week, the euro has taken a different direction against its various counterparts; but one thing has been consistent – volatility. This currency will keep its correlation to risk appetite (especially when paired with a unit that has a comparatively high or low yield); but should these winds die down, market participants will have to make a quick shift to fundamentals. There is a substantial round of data due over the coming 24 hours; but the real drive will come later in the week when the member and regional growth numbers cross the wires. We will see the preliminary (first revision) of the 1Q figures. Under normal circumstances, this would be considered less influential; however, the reissued numbers are expected to see a massive revision. This will likely further lead to surprise upon the release of the first round of the Euro Zone numbers – typically dampened as a composite reading.
New Zealand – The New Zealand dollar is still reeling from the results of yesterday’s Fed Stress Test. Risk appetite was on the rise even before the release hit the wires; and the long-time favored yield currency clearly benefited from the additional boost. On the other hand, this relationship could quickly work against the kiwi should the winds change. 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 10 – May 17[/B]
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[B]Data for May 10 – May 17[/B]
[B]Date (GMT)[/B]
[B]European Economic Data[/B]
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[B]Date (GMT)[/B]
[B]New Zealand Economic Data[/B]
May 13
Euro Zone Industrial Production (MAR)
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May 10
QV House Prices (APR)
May 14
ECB Monthly Report (MAY)
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May 10
Electronic Card Spending (APR)
May 15
German GDP (1Q P)
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May 14
Retail Sales (MAR)
May 15
Euro Zone GDP (1Q A)
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May 17
Producer Prices (1Q)
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>.