AUDNZD – A potentially juicy trade setting up

The Aussie dollar has been prone to some wild swings this week. It all started off few weeks ago with the RBA Governor Glenn Stevens giving a speech to the Australian American Association in New York. In his comments, the RBA Chief made indirect reference to the ‘high exchange rate‘ of the Australian Dollar and that further rate cuts were on the table and something which the Australian Central Bank could dig into if need be.

These remarks sent the Aussie plummeting sharply and once again arousing speculation of May rate cuts. You can read The World Economy and Australia from the RBA website.

Then a couple of days, sentiment in the US soured and with the GDP numbers disappointing for the quarter (they weren’t really, if you consider the bigger picture, but that’s a different story), the markets expected to see the Fed take a dovish tone in its statement. But the Fed left things as were and as is usually the case (they don’t react as quickly or emotionally as the markets do) as the April FOMC statement was simply a copy/paste of March statement.

In the run up to the FOMC though, the Aussie staged an impressive rally and was seen breaking the $0.8 barrier. Then came rumors about a supposed leak from the RBA to an SMH journo, Peter Martin, who wrote on May 1st that the RBA would cut rates in May.

There is a speculation that this media leak ‘could be true‘. You can read the RBA to cut interest rates in May in face of weak economy and another journo sort of Reserve Bank must not get into the habit of leaking interest rate decisions, in case they missed it.

No doubt, the Aussie started to tumble, falling off the highs of $0.8 to trade currently at $0.78.

Amidst all of this speculation, the Kiwi had a good story itself.

It started a week or two ago when the RBNZ Assistant Governor, John McDermott was noted as saying that the RBNZ could cut interest rates if wage and price setting settles at lower levels while also commenting that the New Zealand Central Bank was watching for signs of weaker demand on account of the slump in the Global dairy prices. More RBNZ’s McDermott says OCR cut possible if wage and price setting pressures settle at lower levels.

Then, earlier this week, at the middle of the night (depending on where you live), the RBNZ released its monetary policy statement. While it left interest rates unchanged at 3.5%, the RBNZ did manage to warn of rate cuts should demand continue to fall and then went on to its usual narrative of how unjustified and unsustainable the Kiwi dollar’s exchange rate was. The comments, which were seen as dovish saw a sharp sell off in the Kiwi. Due to the odd timing of the RBNZ, the lack of liquidity was evident as markets gapped down. Since then, the Kiwi has been struggling to get off its feet.

The next main event to look to is the RBA interest rate decision which is due next week on May 5th. It will yet again be a close call and it will be interesting to see how the interest rate decision plays out.

AUDNZD – Technical Analysis

Now that we have a clear understanding of the fundamentals and the market context, its time to look into the AUDNZD from a technical perspective.

AUDNZD – Monthly Chart (May 2015)

AUDNZD Monthly Chart - May 2015
AUDNZD Monthly Chart – May 2015
  • The monthly charts point to a somewhat bullish looking candlestick compared to the previous month
  • Monthly price is trading at 1.0361, below the major support of 1.0605 through 1.0487
  • Therefore, any upside moves are likely to struggle to break above 1.0605 – 1.0487 which could see a test to resistance
  • Monthly price action is still trading within the falling price channel and this bearish view remains intact as long as prices continue to trade below the major broken support and within the price channel rails

AUDNZD – Daily Chart

AUDNZD Daily Chart - May 1, 2015
AUDNZD Daily Chart – May 1, 2015
  • From the daily charts for AUDNZD, we notice price breaking out of the falling price channel
  • Price then made a brief spike to the monthly broken support level near 1.0487 and then fell back
  • Daily candlestick printed a bearish engulfing candlestick on 30/04/2015
  • Price stalled near 1.0363, a minor support and resistance level from the past
  • A break below 1.0363 will see a decline lower between 1.0251 through 1.0219, which is the break out price level from the falling price channel
  • A retest of the break out, so to speak

AUDNZD – H4 Chart

AUDNZD, H4 Chart - Bear Flag
AUDNZD, H4 Chart – Bear Flag
  • Last but definitely not the least, the 4-hour chart shows the real action
  • Firstly, price cut through the median line and then rallied to test the outer or upper median line (UML)
  • Price then quickly reversed gears and fell back and currently trading close to the median line
  • Price action is currently forming a bear flag, which points to a continuation of the decline
  • This bear flag gives a target to a price zone between 1.0251 through 1.0219
  • This price zone is important, as it marks a strong support level, it marks the break out from the price channel from the daily charts as well

For the moment, AUDNZD remains a sell into 1.025 region. Once price action is into this ‘Buy Zone’ we then go long targeting another attempt to 1.0487 followed by 1.05

We then look for renewed long positions after the major monthly support/resistance level is cleared (but we are not too optimistic on that).

The long trade idea from 1.025 regions gets invalidated on a daily close below 1.0185 through 1.0150