We are heading into a period of potentially unusual price action early next week. An extended holiday for US, UK and New Zealand markets will warp liquidity which could lead to untimely breakouts or simply a drop back into congestion bands. This presents significant risk to all range-based strategies; but EURNZD may have a better grounding for holding its congestion.
Why Would EURNZD Hold a Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 0.8935 (Fib, Range High)[/B]
[B]-Range Bottom: 0.8785 (Trend, Fibs, SMA)[/B]
· Though there has been a break in steady risk trends over the past few weeks; the larger trend is still offering general guidance to the market. This is what makes the EURNZD’s month-and-a-half of congestion so unusual. The kiwi has a clear association to risk appetite and the euro can easily be labeled the comparatively stable one. Should price action disregard broader risk trends, a sizable fundamental risk is removed from the equation.
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· Price action for EURNZD has been congestive since early April. Support has played a big role in establishing this recent range. A long-[term](http://www.dailyfx.com/story/currency_crosses/currency_crosses/Euro_Crosses_Under_Pressure_Near_1242748430279.html) 38.2% Fib initially put a floor under a very steady, bear trend near 2.25 last month. Since then, the bearish momentum has ebbed, but minor trends have developed; while support has taken more hits.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: Half-sized entry orders will be placed at 2.2525, is above the past weeks’ range of lows.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 2.2375 is notionally wide, but technically it doesn’t cover our extremes. 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 (150) at 2.2675 and the second[/B][B] target will be 2.2850. [/B]
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Trading Tip –We are heading into a period of potentially unusual price action early next week. An extended holiday for US, UK and New Zealand markets will warp liquidity which could lead to untimely breakouts or simply a drop back into congestion bands. This presents significant risk to all range-based strategies; but EURNZD may have a better grounding for holding its congestion. From a fundamental perspective, we have seen price action for this high-yielding pair deviate from clear trends in risk appetite seen in other corners of the market. And, in the absence of sentiment or event driven volatility, technicals will stand in to hold the market back. Currently, this pair is at the head of two converging trends. In the short-term, the bear wave that was born through March is so far just a retracement in a much larger trend. The dominate drive behind price action comes from the general, bullish drift since the summer of 2007. Consistency was given to this advance last March with a rising trendline that now stands around 2.2330. Our strategy holds with the otherwise solid range of lows and Fib support somewhat higher at 2.2475/500; so the risk of a spike low to test the trendline (like we saw on May 10th and 11th) is a possibility. Regardless, even after cutting our position size in half and the fact that we are trading with kiwi pips, we will still live with this risk to maintain a reasonable risk profile. This setup should play out relatively quickly considering average volatility and the position of our targets; but a breakout also grows more likely with each passing day. Therefore, we will cancel all open orders by the Asian session on Tuesday or should spot hit 2.2350 or 2.29 before we are entered.
Event Risk for Euro Zone and New Zealand
Euro Zone – The euro is straddling the line as a bulwark economy with an attractive yield and a risk laden financial system that could see its interest rates further deflate. Debate will rage on over whether the ECB will further ease rates and take further steps toward outright quantitative easing; and most of the fuel for market driver will come from the high level market movers on the economic docket. The hurdles will be relatively consistent next week. Sentiment readings from the consumer and business sectors will offer a timely benchmark for growth expectations. For less discretionary views of economic health, industrial new orders and German employment numbers are available. Finally, for rate speculators, the leading German and EZ CPI numbers will discount the possibility of another cut.
New Zealand – As is obvious amongst its crosses, the kiwi dollar has been, and will remain, linked to risk trends. General market sentiment is a difficult dynamic to benchmark without specific, market-moving economic indicators to speculate on. There are few key readings on the docket that could act as a catalyst for broader sentiment; so vigilance is necessary. As for internal factors, there is plenty of data on the New Zealand calendar; but there is no guarantee that it will be market moving. Trade and inflation expectations have obvious implications to growth and rate cuts; but the annual budget announcement could be the most pressing driver. With a renewed focus on sovereign credit ratings (after the UK outlook was downgraded), New Zealand debt will be brought into focus.
[B]Data for May 24 – May 31[/B]
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[B]Data for May 24 – May 31[/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 25
German IFO – Business Climate (MAY)
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May 25
Trade balance (APR)
May 26
Euro Zone Industrial New Orders (MAR)
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May 25
RBNZ 2yr Inflation Expectation (2Q)
May 28
Unemployment Change (MAY)
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May 26
NBNZ Business Confidence (MAY)
May 29
Euro Zone Unemployment Rate (APR)
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May 27
Annual Budget
-Written by John Kicklighter, Currency Strategist at DailyFX.com.
Questions? Comments? Send them to John at