I thought I’d step away from the three Forex pairs I regularly keep track of in my Weekly Watch for a very interesting setup on EUR/NZD.
This is a longer term setup that I wanted to take after reading a couple of posts from my homie Forex Gump:
The expectation of a rate hike ahead of March’s RBNZ meeting was probably the general driver for the downtrend in EUR/NZD since topping out around 1.7200 last summer, and recent speculation that the European Central Bank (ECB) may have to battle a possible deflation scenario has been a contributor to keeping pressure on the euro.
With the outlook for the economy and more rate hikes looking bright for New Zealand at the moment, my confidence in a bullish bias on the Kiwi is as high as the Gators winning it all out of the Final Four. And while I don’t think a negative rate scenario will necessary happen this week from the ECB, monetary policy tightening is certainly a very low probability, making the possibility of euro gains much lower than Kiwi gains for now.
And with the ECB meeting coming up this week, I’m going with a break-and-retest setup on EUR/NZD as my initial entry play. The results and reactions off of ECB monetary policy meetings tends to be a crapshoot, so I’m going conservative by waiting for a retest of the broken support area around 1.6050. I also think this move my be slightly overdone and ready for a pullback. If I don’t see a pullback and the euro story remains the same after the ECB meeting, then I’ll go with an alternative entry plan.
My stop will be a little over half of the weekly ATR, and my target is a big one as I go for the next major area of support last seen April 2013. Here’s what I’m doing:
Short half position EUR/NZD at 1.6050, stop at 1.6300, max profit target at 1.5200
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of over 3:1. I actually look to add to this position and trail my stop if it does go my way to safely increase my potential reward-to-risk to over 9:1. The play is to trail/add the same distance as my stop, but I’ll do this manually as I’ll continually watch, reassess, and adjust my plan as necessary.
What do you think? Is EUR/NZD on its way to 1.5200 in 2014? Who will win the NCAA Final Four? Leave a comment below!