The selloff in the Kiwi has been stunning over the past few weeks, but I think it may be overdone on the higher forex timeframes. Is EUR/NZD the best way to play Kiwi long again?
The setup is pretty simple. The market has bounce back up to the 200 day moving average, which happens to line up with several different technical arguments that could possible draw in EUR/NZD sellers:
- Retesting a falling trendline connecting the lower “highs”
- Moving average viewed as dynamic resistance
- 61% Fibonacci retracement area
We can also not only see the stochastic indicating overbought conditions, but also diverging from price action in making higher “highs.” With so many arguments, I think the probability is better than average that we’ll see at least resistance in the major psychological area of 1.5000 if a full reversal doesn’t happen.
Fundamentally, this is a bit of a riskier trade because of recent sentiment that the Kiwi has been pricing in a potential rate cut by the Reserve Bank of New Zealand, but I think those fears have been quelled a bit by commentary from the RBNZ that their are going to focus on cooling down the extremely hot Auckland housing market. A rate cut would certainly, go against that new goal in my opinion. And from the euro zone, I think there is that constant and never ending fear that Greece will default on its debt obligations, so I’m bearish long-term on the euro for now.
Because it’s all happening on the daily chart, I’m going with a very wide stop over its weekly average true range, and my target will be a big one too: the previous swing low about 1000 pips away. Here’s what I am doing:
Short at market EUR/NZD at market (1.5075), stop at 1.5575, profit target at 1.4000
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 2.15:1, as well as collect positive carry. 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!
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