NZDUSD Range Fully Tuned Into Risk Appetite

There has been a sharp pull back in risk appetite over the past week; but this reversal (seen in most risk-sensitive assets) has not yet evolved beyond retracement into a true trend change. This crossroads in sentiment it as clear as it gets for NZDUSD.

Why Would NZDUSD Hold a Range?

· Levels to Watch:
-Range Top: 0.6600 (Fibs)
-Range Bottom: 0.6135 (Trend, Fibs, SMA, Pivot)

· The dollar has found its footing over the past week thanks to a round of comparatively good economic data and a marked turn in risk appetite. There are major fundamental concerns behind NZDUSD: whether sentiment is rising or falling and benchmarking the United State’s pace of economic recovery to the rest of the world. It is difficult to qualify shifts in optimism and growth; but Friday’s G8 meeting and a round of data can alter things.

· There are two, very prominent trends colliding. On a shorter-term basis, this pair is in a steep bear trend (four consecutive down days). There was naturally a need for a retracement after such an aggressive rally from March. However, the bullish bias is still in place; and there are two trendlines, a notable Fib confluence and pivot around 0.6125/50.

Suggested Strategy

· Short: Half-sized entry orders will be placed at 0.6180 to use the proximity of support.
· Stop: An initial stop of 0.6080 offers a buffer over the rising trend and pivot zone. To secure profit, move the stop on the second lot to breakeven when the first target hits.
· Target: The first objective equals risk (100) at 0.6280 and the second target will be 0.6470.

Trading Tip – There has been a sharp pull back in risk appetite over the past week; but this reversal (seen in most risk-sensitive assets) has not yet evolved beyond retracement into a true trend change. This crossroads in sentiment it as clear as it gets for NZDUSD. Fundamentally, the pair is comprised of two diametrically opposing currencies. The New Zealand dollar is the consummate high-yield currency with a particular dependency on the global appeal of its interest bearing assets. On the other end of the scale, the US dollar is prized for its liquidity and expected to remain at the low end of the yield curve for some time to come. Few, specific events threaten to alter this broader market theme going forward; but the RBNZ rate decision on Wednesday and G8 meeting beginning on Friday could get things moving. Looking at the charts, we see that multi-month, bullish bias is still in place. We have very specific levels to work with for NZDUSD; but it is the presence of support on other key assets (equities, treasury yields) that inspires confidence in the face of this past week’s reversal. Our strategy is looking to take advantage of spot’s proximity to support. Our stop is wide enough to cover the pivot (that was the range high from November to May); but to set a buffer this wide and maintain a reasonable risk profile, we had to cut position size in half. We will cancel all open orders before Wednesday’s rate decision or should spot hit 0.61 or 0.6325 before entry.

Event Risk for New Zealand and US

New Zealand – Native event risk is exceptionally dense for the New Zealand currency over the next week – though the market will likely still look for direction from broader risk trends. Forecasting which indicators or events can alter such a broad and encompassing driver is difficult as speculating its ultimate direction. However, policy efforts (and success) in the US, UK and Europe seems to be the most consistent guide to such activities recently. For short-term volatility and directing the kiwi’s place in the risk web, we have a few ky indicators. Most noteworthy is Wednesday’s RBNZ rate decision which is expected to pass without a change. This would follow the general pace of sentiment recently; but conflict with Governor Bollards vow to revive the economy. Contributing to the broader view of growth, both the terms of trading and manufacturing readings for the first quarter will monitor two vital sectors for activity. The GDP numbers are due on the 25th/26th. Finally retail sales will be smaller in scope but timelier in nature.

US – The dollar is a currency that now plays a bigger role in the FX market. It is the safe haven of choice when liquidity freezes up and the favored counter currency when risk appetite is heating up. However, the greenback has greater control over its place in the risk spectrum through virtue of its size and prominence as the world’s reserve currency (for now). Over the coming week, data will add to or detract from arguments that the US is pacing the global economic recovery. If that is the case, the dollar would be seen as a safe haven and a source of higher returns in the near future. Indicators like the University of Michigan confidence survey, retail sales, trade balance, industrial production and housing starts reports will offer a broad look at the economy’s health.