There’s no other way to say it but the Kiwi has been beaten down in April and May. Fortunately, it looks like the bleeding may have stopped and the potential for AUD/NZD to return to the trend may be here.
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This is another longer-term technical trade idea and another attempt to play that really long downtrend in AUD/NZD that’s been going on for years. Recently, we’ve had a very strong negative Kiwi bias on the idea the Reserve Bank of New Zealand may need to cut interest rates down to prevent economic weakness and to pullback a currency that they feel is still too high to stabilize the export economy. That may all be over for now that the RBNZ has vowed to battle red-hot Auckland housing market and keep it from running away into bubble territory. They proposed new lending restrictions, but you gotta think that they won’t cut interest rates either to support that goal.
From Aussie land, the Reserve Bank of Australia’s recent meeting minutes showed that rate cuts may still be on the horizon, but the currency rallied in reaction to the release, likely on a “buy-the-rumor, sell-the-news” scenario. Overall, I think the pressure on the Aussie will come back when the profit taking from the Aussie downtrend has run its course. When that may be we won’t know, but it looks like the rally in AUD/NZD is starting to lose its legs.
Technically, there’s potential for this pair to continue to stall and eventually reverse now that the market is hitting a couple of technical arguments for potential resistance. First, we’re seeing an alignment between the the 61% Fibonacci retracement level and the 200 day moving average, which both tend to draw in sellers on pullbacks higher. I’ll also note that the pair hasn’t made any advances higher after that doji candlestick formation last week, signaling a balance between buyers and sellers. Finally, the stochastic indicator has been in overbought territory since the end of April, so this move may finally be exhausted.
If this rally has finally run out of steam, I think the longer-term players will jump in on this bounce with no hesitation, which is what I’m going to do. I’ll throw in orders at the major psychological level, with a wider than weekly ATR as my stop to play the daily timeframe, and a big ol’ target that also happens to be the most psychological level of them all: parity. Here’s what I’m going to do:
Short full position AUD/NZD at 1.0800, stop at 1.1100, max profit target at 1.0000
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 2.67:1. 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 by following me on Twitter and Facebook!