NZD/CAD has been sliding since flipping into sell mode back in April. And today, it looks like we got a new catalyst for potentially more Kiwi weakness that continues to make this pair attractive to sellers.
Big news of the day comes from the Reserve Bank of New Zealand, who unexpectedly cut the overnight rate by 0.25% to 3.25%. They also hinted that more interest rates are likely as they consider the Kiwi overvalued. The reaction was a quick Kiwi sell-off, not surprising since the news did come out during the lightest part of the day in terms of liquidity (end of U.S. session/start of Asia session).
With more rate cuts possibly in the pipeline from the RBNZ, I’m looking to short the Kiwi, and I chose to play it against the Loonie, not only because of the textbook downtrend that we’re currently seeing, but because of Canada’s close ties to the U.S. (an economy that seems to be recovering well relative to the rest of the majors). I also like that the interest rate differential gap isn’t too big (Bank of Canada rate at 0.75%).
In the recent past, we’ve seen shallow retracements before the continuation moves lower, so I’ll look to short if there is another shallow pullback. The previous support (now broken) areas look like great places to take a nibble into a short position. Here’s what I am doing:
Short half position NZD/CAD at .8800, stop at .9050, profit target at .8400
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 about 1.6:1. Of course, anything can happen in the forex markets (especially with top tier NZD & CAD data next week), so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!