Why Would NZDUSD Hold a Range?
* Levels to Watch:
* Range Top: 0.6085 (Triple Top, Fib, SMA)
* Range Bottom: 0.5650 (Pivot, Fib)
* Risk appetite is the primary, fundamental driver at the beginning of this New Year; and NZDUSD has a direct correlation to this sweeping trend. As the New Zealand currency currently holds (and will likely retain) the highest benchmark lending rate of the G7 and the US is essentially at zero, there is a strong argument for price action to continue and track this relationship. Scheduled event risk will become a significant problem come Friday's NFPs.
* The development in NZDUSD is not a traditional horizontal range. Rather, price action has developed a clear rising wedge that leverages the potential for a breakout. However, the long-only stance our strategy takes aligns itself to the market's natural bias. Resistance is easily defined at 0.6085, but support is moving and therefore more discretionary.
* Long: Half-sized entry orders will be set at 0.0.5850 to keep with the rising floor.
* Stop: An initial stop at 0.5770 will cover the trend only, so a new range could be cut. To secure profit, move the stop on the second lot to breakeven when the first target hits.
* Target: The first objective equals risk (80) at 0.5930. The second target will be 0.6050.
Trading Tip - Direction and volatility are still highly uncertain for the broader currency market. However, in falling in line with momentum and fundamental, our proposed NZDUSD setup benefits from two of three possible scenarios. Congestion has dominated price action for the past two months, though this was seen in trading bands that retained a bias. Now, the relatively uniform advance behind NZDUSD is coming up against a significant level of resistance. With the 200-day SMA, a significant 50 percent Fib retracement and two-month mature triple top all coinciding at 0.6075/85, there is enough pressure to through short-term momentum off its pace. There is certainly room to move for a few trading days to a week in this dwindling range, but the potential for breakouts only grows with times. We are looking to position with short-term momentum that would keep with a horizontal range and a bullish break; but to lower the risk in a trend reversal, we have cut our position size down. To further avoid significant, fundamental event risk, we will cancel any open orders before Friday's NFPs is released.
Event Risk New Zealand And US
New Zealand - Whether global interest rates are high (like two years ago) or low (as they are currently), the New Zealand dollar has consistently held its title as the top yielding currency of the majors. However, the overall level of interest rate is no longer the primary issue for trader, rather the balance between risk and return has turned into the primary driver for price action. And in turn, the kiwi has seen its correlation to risk trends hold through thick and thin. This dynamic could be trend-defining for the coming week as we see the rise is optimism through the start of the year has recently stalled. With global stimulus packages expected to expand while recession pinches credit and growth, there is a significant tug-o-war behind risk trends and the New Zealand dollar. Aside from these general themes, the market will see little in the way of market-moving scheduled event risk. For fundamental trends however, a focus on business activity and housing will be key in the docket. Fourth quarter business sentiment will provide a broad gauge for growth; while building permits and housing prices take the consumer and credit market's temperature.
US - The dollar has found its correlation to general risk trends stand strong after the turn of the new year. However, recently, we have seen that the reduced volatility behind the markets has allowed for speculation over growth potential to take a greater role in the currency's direction. Such a shift could charge the dollar to a significant volatility thanks to a very active economic docket. Tomorrow, event risk warms up with the ICSC chain store sales report for December and consumer credit through November. Both will measure spending habits and the availability of credit through the critical holiday shopping season. Friday's non-farm payrolls represents the greatest potential for volatile markets as estimate place another half-million-plus reduction in payrolls. Such a figure can turn a moderate recession into a severe one. Beyond the weekend, more mundane trade and retail sales figures are due.