AUDNZD a Risky Range With an Acceptable Profile

Just as quickly as risk seems to taper off, it mounts an immediate and aggressive reversal. The market-wide drop in sentiment yesterday turned many assets into critical breaks; yet the reversal that we see today seems largely centered on the FX market and has produced significant trend definition of its own.

Trading Tip – Just as quickly as risk seems to taper off, it mounts an immediate and aggressive reversal. The market-wide drop in sentiment yesterday turned many assets into critical breaks; yet the reversal that we see today seems largely centered on the FX market and has produced significant trend definition of its own. However, trends are not clearly defined; yet high volatility and frequent false breaks has created trouble for range traders. There are a few pairs that can reconcile both fundamentals and technicals to produce a reasonable congestion setup; but they all come with their specific risk profiles. AUDNZD is certainly unique. Momentum is still bearish and pressuring for a breakout. However, this decline (eight days of the last nine) has been measured in terms of drive and received a last gasp plunge today. It is important to note that risk appetite and aversion do not have a direct impact on this pair. Over the past month, frequent shifts in this fundamental current have been smoothed out as both the Australian and New Zealand dollars are considered risky assets due to their relative economic positions and high yields. This exposes the pair to other factors like forecasts for growth and monetary policy as well as native event risk. Economic data from the kiwi docket is of top concern this week with high-level quarterly data. We will cancel all open orders before the GDP release or should spot hit 1.25 before our entry.

Event Risk for Australia and New Zealand

Australia – The influence of risk appetite has had an unusual impact on price action for the Australian dollar. The top-yielding major maintains its connection to broader market sentiment; but there has been a far more aggressive response to rising optimism in comparison to an equivalent rise in pessimism. This is likely a reflection of the stable fundamentals underlying the economy and the RBA’s neutral turn on monetary policy. However, this advantage could quickly become a burden. Should the prospect of a lagging recession or a renewed round of rate cuts garner traction among speculators, there is a lot of premium built into the Australian currency that could be worked down. Looking ahead, there are a few indicators that can help erode or fortify fundamental support. Retail sales, private sector credit, and the HIA new home sales all have a consumer factor.
   
New Zealand – The New Zealand dollar is highly attuned to risk trends. However, it is the deterioration of the currency’s benchmark interest rate that draws the close link. With its yield advantage shrinking quickly, the currency’s primary appeal is fading. The outlook for growth and returns could collapse even further over the coming week given the heavy round of event risk on deck. Our top concern is the 1Q GDP release due on Thursday evening which will offer a bearing on how aggressive the RBNZ will have to be going forward to recharge the economy. Other notables that should not be overlooked are the current account balance and Westpac consumer confidence survey for the first and second quarter respectively. New Zealand is largely an export currency; and its trade deficit is a primary consideration for its credit rating. The sentiment reading is the best indicator to glean a sense of 2Q growth potential.