A Wide Range and High Volatility Require a Specific AUDNZD Setup

Our range setup for AUDNZD last week would ultimately fall apart as the bullish rally was fed by impressive fundamentals on the Aussie’s side. However, from a fundamental and technical perspective, the pair looks to be in a far better situation for a range. This is not a traditional, tight congestion pattern.

Trading Tip – Our range setup for AUDNZD last week would ultimately fall apart as the bullish rally was fed by impressive fundamentals on the Aussie’s side. However, from a fundamental and technical perspective, the pair looks to be in a far better situation for a range. This is not a traditional, tight congestion pattern. The boundaries for support and resistance are roughly 500 points apart, which is ultimately beneficial as it allows for considerable volatility without having to resort to a breakout. At the same time, a strategy for this time of setup must also follow certain specifications. Considering the breadth of our range (defined by a descending trend channel) and the sizable tails that define short-term reversals; our entry must be set aggressively. Otherwise, a setup that looks further within the range will have to have a much wider stop and will simultaneously sport limited potential for return. The entry level we have laid out would be best served in another, sudden burst and short-lived burst to the upper boundary that ushers in a reversal. Such a scenario has only a limited time frame to play out in; so we will cancel all open orders within 36 hours or should spot hit 1.22 before we are entered. It is important to monitor price action as it (should it) advance towards the upper range extreme – especially if it follows the 3Q CPI data.

Event Risk for Australia and New Zealand

Australia – In just a week’s time, the Australian dollar has seen its fundamental health turn from bullish to very bullish. Adding weight to the general outlook for the Aussie economy to return to growth after staving off a recession through the second quarter, employment data unexpectedly reported a downtick in the unemployment level from six year highs with a 41,000 net addition to national payrolls. This certainly encourages hawkish expectations; but the real drive behind interest rate forecasts was the RBA’s surprise rate hike. The first of the G-20 economies to actually hike its benchmark rate, the policy group has not only set itself up to be the high yielding currency amongst its peers; but it has further bolstered expectations for higher income expectations on carry positions (thereby encouraging the strategy as a whole). As for fundamental drivers this week, sentiment indicators will add to growth forecasts while consumer inflation expectations will help define the central bank’s pace. However, none of the data is highly market moving.

New Zealand – Like its Australian counterpart, the New Zealand dollar is one of the markets favored high-yielding currencies (an enviable title considering the strong build in carry over the months). However, whereas the Aussie dollar is backed by strong growth and an actively hawkish monetary policy; the kiwi is depending heavily on its role as an investment currency and its current yield differential over the rest of the market. This puts is a precarious position to be in. While rising risk floats the dollar, a collapse in sentiment could lead to a far more dramatic plunge due the lack of fundamental backdrop. On the other hand, Tuesday’s better-than-expected retail sales report has given reason for optimism for bulls. There are a few notable releases on the docket that could better position New Zealand fundamentals; but the 3Q CPI data holds the real promise for volatility. 

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected].