Viable range setups are growing scarcer in the currency market. A slow and questionable turn in risk trends over the past few weeks has left many pairs threatening meaningful reversals; yet they are still just off the extreme of impressive, six month rallies that could easily be revived.
| How stable is the NZDUSD Range? • Levels to Watch: -Range Top: 0.7250 (Range High) -Range Bottom: 0.6900 (Trend, Fibs, SMA) • Risk appetite has been the primary fundamental instrument of NZDUSD price action since the March reversal. A significant yield differential between the kiwi and US dollars keeps the pair set on track with broader sentiment trends. However, speculation also plays a significant part in holding this pair up. There has been significant premium afforded to US rates being held near zero and the RBNZ turning to hikes soon. Near term, our concern lies with NFPs. • No matter which way you slice it, NZDUSD is in a bullish trend. However, the consistent anti-dollar drive is certainly growing strained (with this pair and across the majors). Recent congestion between 0.71 and 0.7250 offers another opportunity for a market turn. A break of the steady trend for September would be the first step in a trend change. Suggested Strategy • Short: For an aggressive approach to playing the larger trend reversal the entry is 0.7230. • Stop: The 9/23 spike high makes placing a stop tricky. Our stop of 0.7290 doesn’t cover the high. To secure profit, move the stop on the second lot to breakeven when the first target hits. • Target: The first objective is one-and-a-half times risk (90) at 0.7140. The second is 0.6980. |
Trading Tip – Viable range setups are growing scarcer in the currency market. A slow and questionable turn in risk trends over the past few weeks has left many pairs threatening meaningful reversals; yet they are still just off the extreme of impressive, six month rallies that could easily be revived. Looking for opportunities that we haven’t already covered for the week, it is clear that we have to move away from the traditional congestion band and look more to ranges with an underlying bias. NZDUSD has carved a definable range pattern in the form of a rising trend channel. We are currently near the top of this formation and looking for a turn fights the dominant trend and is as much a setup for a reversal as it is a turn in a congestion pattern. We have to take this into account when gauging the risk our setup carries. Adding to the danger in approaching such a strategy, we also have a major catalyst for volatility in tomorrow’s NFPs release. This is clearly a position only for those very comfortable with the risk involved and that have a bullish bias on the US dollar. The strategy we have laid out is very aggressive with an entry just below a recent range high and a stop that doesn’t look to cover last month’s bullish spike. However, this does have its advantages as it we have a buffer to the US employment data to allow for entry and a meaningful fundamental development in the dollar’s favor. A more cautious approach can be taken. A confirmed break of the rising trend of higher lows through September (now around 07125/45) can be used to confirm the fundamental bias after tomorrow’s data. On the other hand, that would require a wider stop and a first target that demands a target that calls for a deeper reversal.
Event Risk for New Zealand and the US
New Zealand – Scheduled event risk for the kiwi dollar is relatively light over the coming week. Only two notable indicators threaten volatility through the low liquidity hours of the overnight session: the NZIER Business Opinion Survey and electronic card spending. Both readings play their part as meaningful measures of activity for two critical sectors for growth. Card spending is the lesser of the two but a good gauge of consumer health and credit availability. The 3Q business survey carries more weight but is ultimately proprietary. In the end, the real guide for kiwi price action is risk appetite and speculation as to the timing of RBNZ rate hikes.
US – Is the dollar still attempting to wrench the title of top funding currency away from the Japanese yen? It is difficult to tell considering risk appetite has been tempered for days now. Over the long-term, however, it is very unlikely that the greenback would hold on to such a role as market rates in the US will naturally recovery as stimulus is wound back and investors find their way back into speculative assets. In the short-term through, this can still be a problem for the dollar and a severe catalyst for volatility. The spark for the next wave of risk appetite or aversion is hard to judge; and ultimately, the driver will likely be unforeseen. However, the US docket carries its own weight for risk appetite and fundamentals. Top event risk is this Friday’s employment report. We have come to expect a consistent improvement in pace; so a modest disappointment may not elicit the same response as a better-than-expected read.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected].
