Here’s a simple, longer-term play on GBP/NZD, which may be pulling back from its recent strong bearish move. Another opportunity for forex traders to play the selloff?
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The New Zealand dollar has been on a tear lately, despite recent rhetoric from the Reserve Bank of New Zealand pointing to the possibility that further interest rate cuts ‘seem likely.’ This is likely on the back that recent economic data has been showing some improvement (manufacturing and imports picking up), and possibly on some broad risk-on sentiment after a really bad round of risk aversion thanks to China and global growth fears. And from the U.K., the pound has been feeling pressure on sentiment that a potential rate hike is not likely to come anytime soon from the Bank of England. Of course, the question now is, “what’s next?”
Since I can’t see into the future, I think I’ll just go with the downtrend on this one for now given that the big picture sentiment has favored the Kiwi over the pound recently. But, I want to do it at a much better price, specifically at at the now broken support area around 2.3500. That’s quite a ways away, but the weak NZ Global Dairy Trade and the upcoming U.K. retail sales numbers may get me up there. I like that area to short because of the previous strong interest and that it is a Fibonacci retracement of the latest swing move; setups like that tends to draw in sellers in recent strong moves.
My stop will be a wide one since this pair averages almost 700 pips of movement per week, and my target will be the major psychological area and 50% Fib retracement of the longer-term swing move higher from 1.93 – 2.45. Here’s what I’m doing:
Short half position GBP/NZD at 2.3500, max stop at 2.4100, max profit target at 2.19
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 2.66:1. 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!