Risk appetite has been fueled across the board today; but the drive behind this turn in optimism is questionable. Aside from optimistic commentary from US Treasury Secretary Fed Geithner (which offered little encouragement for the dollar – especially after the dour FOMC minutes), the fundamental winds behind this move have been relatively light. This is a boon for a long-term NZDUSD range.
Why Would NZDUSD Hold a Range?
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 0.6100 (Fib, Triple Top)[/B]
[B]-Range Bottom: 0.5525 (Range Low, Fib, SMA)[/B]
· Over the past 24 hours, the gradual advance in risk appetite has been catalyzed to new multi-week and month highs. However, while many dollar based pairs and equities have surged to new highs, NZDUSD has not seen its momentum fade before pushing major resistance. This ceiling could be forced though should the advance in optimism continue into tomorrow and beyond. In the meantime, [scheduled event risk](http://www.dailyfx.com/calendar/index.html?currentWeek=/events-calendar/2009/0517/&direction=none&collector=allInFolderDateDesc&view=week&timezone=GMT¤cyFilter=EUR|JPY|GBP|CHF|AUD|CAD|&importanceFilter=) is staid.
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· Once again, it is short-term momentum versus long-term [technicals](http://www.dailyfx.com/story/bio2/Canadian_Dollar_Tests_Elliott_Guideline_1242826283300.html) for a risk sensitive currency pair. So far this week, NZDUSD has rallied nearly 250 points after stalling support around 1.5830 - a fib, 200-day SMA confluence. Our primary interest is in the long-term triple top (six months) at 0.61 and further backed by a long-term 38.2% Fib 50 pips higher.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Short[/U][/B][B]: Entry orders will be placed at 0.6085, which falls well within recent highs.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 0.6155 covers that range of highs back to October but not much more. 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 (70) at 0.6015 and the second[/B][B] target will be 0.5885. [/B]
[B]Trading Tip [/B]– Risk appetite has been fueled across the board today; but the drive behind this turn in optimism is questionable. Aside from optimistic commentary from US Treasury Secretary Fed Geithner (which offered little encouragement for the dollar – especially after the dour FOMC minutes), the fundamental winds behind this move have been relatively light. This is a boon for a long-term NZDUSD range. Should the momentum behind this optimism flag, this pair would be in a good shape for a reversal at the border of a long-term range formation. Our suggested positioning provides a good basis for just such a reversal while keeping exposure down should indeed be in the cards. To fit our parameters, we have developed an entry level that is well within the recent range of highs, set a stop with a buffer well above the extremes of the six-month congestion zone, and placed stops at easily achievable levels. Realistically, this position carries significant risk of breakout considering the actions of other asset classes; but our setup allows for normal position size. To be a successful setup, NZDUSD (and broader risk) will have to stall relatively soon to hold up resistance. Therefore, we will close all open orders by mid-US session Friday should our open orders linger. Otherwise, should spot hit 0.6150 or 0.5975 before we are entered, the orders will similarly be canceled.
Event Risk for New Zealand and US
New Zealand – There is little doubt that the New Zealand dollar is primarily finding its fundamental drive through its link through speculative sentiment trends. This past week, we have seen equities and other retail-favored trading products head higher as forecasts for growth and financial market health improve; and the stimulus has in turn boosted interest in the high yielding kiwi dollar. A dramatic turn in growth and credit conditions would be needed to divert the RBNZ from its dovish rate regime of the past year. There are few key indicators that can provide such a shift on their own over the coming week. However, there is the possibility of short-term volatility through New Zealand’s own economic docket. Before the weekend, the April Credit Card Spending numbers will give a duel measure of lending conditions as well as consumer spending. After the weekend, the trade balance, RBNZ’s 2Q inflation forecasts and NBNZ business sentiment survey will carry moderate interest. Lasting moves through such fundamentals however is unlikely.
US – Over the past 24 hours, it was clear that the dollar has been tied up predominately in evolving risk trends. While the greenback has enjoyed strength through the fear and deleveraging that highlight the currency’s safe haven status, the uncertain outlook for growth and financial health in the US as a reflection of the government’s policy efforts makes it equally vulnerable to the opposite scenario in sentiment. This correlation does not look as if it will fade anytime soon; and as such, it will remain our primary interest when scanning for fundamental influence over the dollar. From the economic docket, the FOMC minutes that came out a few hours ago was the top headline this week; but there are notables after the weekend. Consumer confidence and housing data will top the docket.
[B]Data for May 21 – May 28[/B]
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[B]Data for May 21 – May 28[/B]
[B]Date (GMT)[/B]
[B]New Zealand Economic Data[/B]
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[B]Date (GMT)[/B]
[B]US Economic Data[/B]
May 20
Credit Card Spending (YoY) (APR)
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May 21
Leading Indicators (APR)
May 25
Trade Balance (APR)
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May 26
Consumer Confidence (MAY)
Apr 25
RBNZ 2yr Inflation Expectation (2Q)
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May 27
House Price Purchase Index (1Q)
May 26
NBNZ Business Confidence (MAY)
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May 28
New Home Sales (APR)
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>.