Since making a record high at 1.3792 in March of 2011, price action on AUD/NZD has been freefalling and has found major support around the 1.05 handle. Price actually made a key low on January 24th at 1.0489 and has started to form a bullish channel that is in the process of being broken.
The key driver with this currency pair has been the Reserve Bank of New Zealand’s tightening path. The central bank has forecasted 200 basis points in hikes to occur over the next two years, and with last week’s hike surprise, 75 basis points has already been done. Expectations are also growing for the bank to possibly hike again in July and this could very help support a return to this year’s lows. Currently the Reserve Bank of Australia is expected to keep rates steady for the rest of the year.
Another major drop in world dairy prices and a big miss in Q1 New Zealand GDP can derail kiwi strength. This is unlikely, but traders may decide to lock in some profit if GDP comes in below 1.2% for the quarter (below 3.0% y/y).
Price action on the 4-hour chart shows that since making a head-and-shoulder pattern, price has tentatively found support from the 1.08 handle. That area also coincides with the 100-day SMA (currently at 1.0783) and could open the door for fresh selling once it is taken out. Key support will come from the heavily tested trendline at 1.0750. Further downside may target the 1.0660 region. Only a daily close above 1.0850 will change our immediate bearish bias.
The trade: Sell AUD/NZD at 1.0830 with a stop loss at 1.0870 and a take profit at 1.0750 The Risk/Reward Ratio is 1:2
Edward J. Moya
WorldWideMarkets Online Trading