NZD/CAD Reversing to the Downside?

With recent bearish sentiment bias revving up on the Kiwi, I thought the turn lower on NZD/CAD may be an opportunity to go with fresh momentum and long term potential.

NZD/CAD Daily Forex Chart

NZD/CAD Daily Forex Chart

Early in the Asia session, the RBNZ joined the rest of the recent central bank doves in their latest monetary policy statement, citing low inflation and a high currency as concerns and effectively closing the door on any further rate hikes (the RBNZ raised rates 4 times in 2014).  Forex traders went to work on Kiwi with this news, pushing it lower on the possibility of a rate cut, not only from the RBNZ down the road, but also from the Reserve Bank of Australia who meets next week (because of their close proximity and trade relationship, the Kiwi and Aussie have a strong correlation in price behavior).

So I decided to go short the Kiwi on the reversal of last year’s rate hike sentiment, and to do it against the Canadian dollar. Besides already getting a rate cut from the Bank of Canada out of the way, I think the weakness the Loonie saw influenced by the oil crash from $107 to $44 may be overdone; at the very minimum, the risk-to-reward looks more favorable to go long oil and the Loonie than short.  Plus a part of Canada’s strength is often helped (or hurt) by their largest trading partner, the U.S., who seems to be the best of the bunch at the moment (positive economic data and looking to hike rates this year or next).

Technically, the pair seems to have failed to break above the 2014 highs, and it looks like reversal to the downside may be confirmed.  I’ve decided to short on a slight pullback higher to the minor level of interest, with a very wide stop of more than 2x the weekly ATR since I’m looking at a longer-term position.  The next area of major support maybe the 2014 lows, where I’ll re-assess and adjust if necessary.  Here’s what I am doing:

Short NZD/CAD full position at .9150, max stop at .9550, initial target at .8650

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1:1.  Ultimately, I’d like to shoot for .8000, which would make this a more than 2:1 trade, but I’ll have to re-examine the situation if my initial target is hit. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!