AUD/NZD has been in a downtrend for a few months now, and we just saw bearish patterns that indicate the move is still intact.
Slow Grind Lower in AUD/NZD
Fundamentally, the Aussie has been getting no love lately, likely due to concerns the RBA has over rising household debt, weak inflation, and geopolitical drama pulling down overall risk sentiment assets like the high-yielding currencies.
The New Zealand dollar is in the same boat as well in terms of the overall influence from risk sentiment, but it’s doing better on the inflation front, and expectations are for wages and unemployment rates to improve going forward. It’s relatively high interest rate against the majors probably gives it a little demand boost as well.
This month, we’ll get the Reserve Bank of Australia’s latest monetary policy decision coming very soon and a fresh round of quarterly inflation data from both Australia and New Zealand to potentially spark some volatility. But it’s very likely we’re not going to see new rhetoric from the RBA this week, so the inflation might be the one to watch when they hit us in the next few weeks.
From a price action stand point, the market has been in a slow grind lower since mid-January after topping out around 1.1070, and recently forming a channel pattern of lower ‘highs’ and ‘lows’. In the last week or so, a minor support level was broken and retested around 1.0650, with the bearish holding the line and pushing the pair lower once again. This is where I look to play the downtrend for a potentially long-time, depending on the outcome of this month’s economic releases.
But with stochastic showing potentially short-term oversold conditions and the market about to test the bottom of the channel, a bounce could be just ahead. So, I’m going to be a little bit conservative with my entry by waiting to see if I can get another restest of the support-turned-resistance area. My initial target will be the major support area that held back in 2017. Here’s what I’m doing:
Short half position AUD/NZD at 1.0650, max stop loss at 1.0825, initial target at 1.0400 for a starting return-on-risk of around 1.42
I’ll be risking only 0.5% of my account on this position and as usual, I’ll look to maximize the trade by adding to my position/roll stop down to max out the trade if the conditions continue to favor the New Zealand dollar. Of course, I’ll look to close out quickly if conditions or data changes back in favor of the Aussie.
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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