Another Forex Short on AUD/NZD

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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AUD/NZD Daily Forex Chart

AUD/NZD Daily Forex Chart

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

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 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!

  • PipMeHappy

    I take a different view… The RBA may be dovish but the RBNZ has had a tremendous shift down from most bullish to most dovish of the G8 central banks in the space of a year, and the stall around 0.75 – 0.74 in the NZD/USD has finally given signs of breaking: this has given a whole trading week of AUD/NZD bullishness above the 200-day simple moving average (daily chart); while this pair has had a whole year (2014) of missed opportunities to rise from all-time lows and be a ‘buy and hold’ pair for many, it looks like we are in a five-consecutive-candle bullish phase on the weekly chart, rising from 1.00 to above 1.08, and an accumulation/pause is only temporary. While the two economies, like in the case of the USA and Canada, have close ties, the tremendous dovish shift in the RBNZ’s policy has been giving the AUD a tremendous advantage against its Kiwi counterpart: even though it is unclear how this trend will develop, a push higher is not improbable, and certainly more attractive than a continuation to the down-side, long-term. Seeing this pair break the 1.10 level in the medium-term is certainly on the cards, but of course the question is this: what will move the AUD/NZD more? Will it be AUD/USD or NZD/USD? This can change throughout the year, so the trend may struggle to take a clear form quickly: if reversing to the upside, as it seems to be doing, then it will need either a weak NZD/USD or a strong AUD/USD for continuation; where a very strong USD would push NZD/USD to the downside, it would also do so with AUD/USD, so a USD return to bullishness could affect this pair either way. What would really push this pair up further would be a confirmation of the market forecast of an RBNZ rate cut this year, although some of it has already been priced in.
    I am for AUD/NZD strength in the long-term, although the next month (leading to the forecast first Fed rate hike in June) will be crucial.

    Post by BabyPips FX-Honorary Member PipMeHappy.

    • Pipcrawler

      Thanks for your analysis and thoughts PipMeHappy… I really appreciate you sharing 🙂 Now that a couple of weeks have passed and more data has come by, are you still seeing a break above 1.10 or are you still gonna wait for the Fed?

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