Keeping it simple once again with this downtrend on AUD/NZD. What’s the setup and are the fundies supporting the move lower?
Downtrend Pullback on AUD/NZD
Fundamentally, I haven’t been a fan of the Aussie dollar due to the expectations of low inflation conditions to continue, the recent weak Aussie employment data, and the huge debt problem the Australian economy faces. These are conditions in which the Reserve Bank of Australia isn’t likely to hike rates, and with the U.S. – China trade war developing, I’m more in favor of shorting the Aussie once again as China (one of Australia’s main trading partners) is likely to be hit with tariffs down the road.
As for the Kiwi, I’m not really that bullish on the New Zealand economy as it has its own low inflation conditions to worry about and a recent pullback in its GDP growth number, but I think relative to the Aussie it is a buy because of its higher interest rate and it’s a good hedge against the beating the comdolls have been taking lately.
It’s also kind of a hedge against global risk sentiment drivers as both are considered “high-yielders” relative to the other majors, so I think developments in the trade war story or any other geopolitical events will likely have a lower impact on this pair as those non-economic drivers are negated out.
In terms of price action, the pair has been in in a downtrend for the last month or so, and after bouncing higher from the 1.0650 handle, it looks like sellers took the helm around the broken previous support area between 1.0750 – 1.0800, which also happens to be the 50%ish Fibonacci retracment area. So odds are that technical sellers will be drawn in around here, and the stochastic indicator is showing overbought conditions, which is likely to help give more confidence to sellers.
So, I look to short the pair with limit orders above the market as I wanna get in at a better price, and if I do get in, my stop will be roughly the weekly ATR. My initial target will be 2018 low last seen back at the beginning of April but I may let the trade run from there based on the upcoming central bank monetary policy meetings. Here’s what I’m doing:
Short half position AUD/NZD at 1.0775, max stop loss at 1.0925, initial target at 1.0500
I’ll be risking only 0.5% of my account on this position and as usual, I’ll look to maximize the trade by keeping the trade open and adding to my position/roll stop down if the upcoming RBA meeting (July 4th) and RBNZ meeting (June 28th) favors the downtrend. They could be big volatility catalysts that could get the pair down to that 1.0500 handle and beyond. We’ll see.
Stay tuned and as always, 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 simply follow what I do.
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