After a slow grind lower in June, downside momentum has picked up in AUD/NZD in July. What’s happening and do the bears still have legs?
AUD/NZD Downtrend Setup?
On the four-hour chart of AUD/NZD above, we can see the bears have been kicking butt since mid-June where the pair topped out around the 1.0800 major psychological handle.
The pace of the downtrend has actually picked up steam in July, likely on the rise of covid-19 cases in Australia, sparking lockdown extensions in its major cities like Victoria.
Bullish sentiment has also grown on the New Zealand dollar in recent weeks as rate hike speculation grew quickly, likely supported by a surprise surge in New Zealand inflation data and the end of quantitative easing by the Reserve Bank of New Zealand. New Zealand has also been very successful with suppressing the covid-19 pandemic, creating an environment for their economy to continue to recover.
This environment is likely to continue for the next few weeks, and volatility is likely to stay elevated for AUD/NZD over the next few weeks as we get quarter inflation data from Australia at the end of July, and monetary policy statements from both the RBA and RBNZ in the first half of August.
Given the current environment and outlook that the RBNZ may hike rates and that Australia may continue to feel the sting of the rise of covid-19 cases, this makes AUD/NZD a potential candidate for a swing trade or even longer-term short position.
This trade would also have a stronger probability of success if global risk sentiment shifts back to positive, given that the Kiwi tends to outperform the Aussie in a risk-on environment.
We’ll be watching AUD/NZD for a couple of short entry setups if this environment holds. First, possibly a nibbler entry on a break of the minor support area currently around the 1.0550 handle.
Or if the pair bounces from the current levels, we’ll be on the lookout for a retest of the 1.0600 – 1.0650 area for bearish reversal patterns before putting on a more significant position size.
With a weekly ATR of around 100 pips, that puts a potential invalidation price area above the 1.0700 level if using a two weekly ATR as a stop guide; plenty of space to give this trade room to breath over the next month and weather any potential surprises.
What do you all think? Does AUD/NZD still have legs to make new lows after a strong run in the first half of July? Let me know in the comments section below!
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