The AUDNZD's Short-Lived Boost in Volatlity May Have Refined its Range

While congestion has been a common characteristic of the Forex market over the past month, high volatility has blurred levels of support and resistance with false breakouts. Establishing clear levels for entry, stops and targets is as vital to a successful range trade as the underlying price action itself. Therefore, conditions are still not favorable for this strategy on the whole.

[B]Why Would AUDNZD Hold a Range?[/B]

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         ·         [B][U]Levels to Watch:[/U][/B]

         [B]-Range Top:       1.2935 (Long Term Triple Top)[/B]

         [B]-Range Bottom: 1.2485 (Trend, SMA, Fibs, Pivot)[/B]

         

         ·         Swells in risk appetite over the past few weeks have generated significant volatility and frustrating, false breakouts. These are certainly not conditions that are favorable for range-based trading. However, both the Australian and New Zealand dollars are on the same side of the risk spectrum. What’s more, there strong trade ties bind the strength of their respective economies. This morning’s [NZ budget announcement offered volatility](http://www.dailyfx.com/story/market_alerts/fundamental_alert/New_Zealand_s_Fiscal_Budget_to_1243476551797.html), but it wouldn’t last.  

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         ·         Congestion is obvious for AUDNZD; but the boundaries to this general pattern are vague. High volatility this morning dipped below a recent range low seen around 1.2550. However, the is a zone of support with a rising trend, notable 50% Fib, 50 and 100-day SMAs around 1.2475/500. Greater support comes from the general bullish bias guiding this pair.

         

         [B][I]Suggested Strategy[/I][/B]

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         ·         [B][U]Long[/U][/B][B]: Half-sized entry orders will be placed at 1.2520 for a reasonable buffer above support.[/B]

         ·         [B][U]Stop[/U][/B][B]: An initial stop of 1.2440 should cover volatility should daily closes not trend lower. 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 (80) at 1.2600 and the second[/B][B] target will be 1.2770. [/B]

                         [B]Trading Tip [/B]– While congestion has been a common characteristic of the Forex market over the past month, high volatility has blurred levels of support and resistance with false breakouts. Establishing clear levels for entry, stops and targets is as vital to a successful range trade as the underlying price action itself. Therefore, conditions are still not favorable for this strategy on the whole. AUDNZD has the fundamental standing to dampen the market’s predilection to sentiment-derived volatility as both currencies are considered key high yielders and they are also primary trade partners. On the other hand, the technical extremes to this pair’s month-and-a-half congestion band have been pushed and distended. This is still a risky setup; and a strategy with a tolerable risk profile is essential. To conform with the tough market conditions, our setup first cuts our position size in half to reduce risk. For the strategy itself, we have set an aggressive entry that is below the more distance support level and further placed a stop well outside the normal bounds of volatility. If the markets quiet down after yesterday’s unusual surge in volatility, spot may struggle to once again reach our entry level. Nonetheless, we will close any lingering entry orders by Friday’s close.

[B]Event Risk for Australia and New Zealand[/B]

[B]Australia [/B]– Is the Australian dollar the most fundamentally sound currency among the majors? So far, the nation’s recession has been comparatively mild and the financial crisis relatively mild. However, this was the same condition the UK was in 18 months ago and the Euro Zone seemed to be in just last year. The scope of the recession and credit troubles of the past two years are global; and a specific, domestic catalyst can quickly send the Australian economy racing to catch up with its poorly performing counterparts. With these kinds of comparisons, it is understandable to see the markets hesitation to treat the Aussie currency as the strong fundamental and safe haven security that it seems to be. Looking over the next week though, we may finally see the catalyst that confirms lingering fears or completely disbands them. Amid a number of notable indicators, the RBA rate decision and first quarter GDP releases are key. The return and stability to be found in Australia will be confirmed in the span of just a few hours.

[B]New Zealand [/B]– The New Zealand dollar has been extremely volatile over the past 24 hours thanks to the Government’s annual budget release. Though the projections for growth and fiscal shortfalls was discouraging, market participants were more interested in the forecasts for the deficit. While the government’s debt to GDP ratio is expected to grow, a deferred tax cut is expected to keep it from ballooning to levels that would threaten the country’s sovereign debt rating. After the figures were tallied and rating agencies raised their forecasts, a weight was lifted off the community’s shoulders and one of the most lucrative yields in the market was secured for another day. After this big sigh of relief for the kiwi dollar, we have little in the way of scheduled event risk to worry about over the coming week. Instead, we will see general risk trends and speculation over future RBNZ policy decisions take control.

                                      [B]Data for May 29 – June 5[/B]

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                                   [B]Data for May 29 – June 5[/B]

                                                     [B]Date (GMT)[/B]

                                   [B]Australia Economic Data[/B]

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                                   [B]Date (GMT)[/B]

                                   [B]New Zealand Economic Data[/B]

                                                     May 31

                                   Retail Sales (ARP)

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                                   May 28

                                   Building Permits (APR)

                                                     May 31

                                   Company Operating Profit (1Q)

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                                                     Jun 2

                                   RBA Rate Decision 

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                                                     Jun 2

                                   GDP (1Q)

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