Fx traders have their minds focused on the US dollar, which appears to be at an inflection point created by rising prices in the US and how the Fed will eventually react (or not react) to contain the inflation. However, until the Fed announces something big, it can be highly uncertain where the USD will move, e.g., whether it breaks up or down. 

It’s also very difficult to estimate whether inflation will keep rising after this month’s hot 5.4% y/y reading or start falling. Depending on what happens with inflation, there are significant contrasting implications for Fed policy and, therefore, the dollar. The Fx market won’t push the USD higher or lower before it knows where inflation will move. And the trading ranges on the charts confirm that the market is in a holding pattern and not ready to break out yet. This likely means more choppy range-trading and, if any at all, unclear trade setups.

So, we are turning to other opportunities on the crosses for this week, which may offer more attractive and safer opportunities than USD pairs. One attractive setup exists on the AUDNZD pair, especially after the latest hawkish surprise by the RBNZ yesterday (read more about this below). 

Another interesting opportunity for the period ahead related to the RBNZ’s surprise could be long NZDCAD. But, we’ll leave that one maybe for next week’s newsletter, and today we’ll focus on the short AUDNZD opportunity.

First, let’s look at the charts. AUDNZD has been in a steady decline since late March except for the short but sharp correction last month. The pair is now back at the May lows around the 1.06 level and could break the support here.

Still, AUDNZD’s nature of moving gradually within trends suggests a downside continuation and breakout below 1.06 may not be a straightforward process. The price dropped like a rock on the RBNZ announcement yesterday but has stalled since then, right at the 1.06 support area.

The bounce so far has been gradual, but nonetheless, it could lead AUDNZD a tad higher, closer to the resistance area. After all, it’s never wise to sell at a support area, and this is the main reason why we prefer waiting for higher levels to go short.

As shown on the chart, AUDNZD is trading inside of two channels, one larger and one smaller. Currently, it’s at the support line of the smaller chart. So preferably, we want to sell near the resistance line of either the larger or smaller channel.

Also, 1.06 is an important weekly support zone shown with the highlighted greenish area on the chart. If/when AUDNZD breaks below this 1.06 support area, further downside price action should come easier. The large channel projects a target about 200 pips lower, toward the 1.04 area that is likely to come sometime in late August or early September.

Entry: 

• 1.0680 zone or higher; Preferably, wait for a retracement toward the resistance, currently located at 1.0680 (smaller channel) or at 1.0720 (larger channel); Look to enter short on bearish patterns near one of them.
• If AUDNZD doesn’t retrace higher from here and instead breaks lower, a short entry lower would probably still be appropriate in that case. But even then, it’s better to not rush and aim to enter near a resistance area.

Stop: 

• Above the July 13 high (1.0740); 
• i.e. above 1.0750 just to be on the safe side 

Targets:

• 1st: 1.05, can take partial profits here
• 2nd (main target): 1.04 area probable to come in August or September

So, with the technicals leaning on the bearish side, we have to also ask, what are the fundamental factors that should drive AUDNZD lower? 

Monetary policy divergence between the two central banks, RBNZ and RBA, is becoming increasingly more evident.

The Reserve Bank of New Zealand (RBNZ) delivered a striking hawkish surprise yesterday when they announced they will completely end QE next week instead of only reducing the pace. The markets expected a hawkish RBNZ, but not to this degree. Certainly, New Zealand is among the countries that were least impacted by the Covid pandemic. That has tremendously benefited the economy to the point where the central bank is ready to lay out plans for tightening policy.

In contrast, Australia is currently experiencing an increase of Covid infections (though within control so far), with Melbourne and Syndey now in lockdown. The RBA also recently suggested that any plans for raising rates are far off into the future, and the latest developments can only push those plans further. This is an important contrast with New Zealand’s central bank.

In addition to the above, commodities to which the AUD is closely correlated, like copper and iron ore, have cooled off recently after their stellar rallies. A deeper sell-off in commodities could drive the AUD dollar lower, while the kiwi should continue to benefit from the hawkish RBNZ. 

• July 9, 2021 - Long EURCHF from 1.0850 (in progress)
• Long USDCHF hasn’t been triggered yet but is getting closer (trade idea sent on June 18)