AUD/NZD is a unique pair that compares two commodity and risk oriented currencies, the Australian Dollar and the New Zealand dollar. Due to the sensitivity of both currencies to risk AUD/NZD becomes a study in the effect of interest rate expectations. The significant downtrend that AUD/NZD has been stuck in is a result of diverging central bank rhetoric between the Reserve Bank of Australia and the Reserve Bank of New Zealand.
The RBA cut rates as recently as August dropping the overnight rate to a record low of 2.5%, down 2.25% from as recently as 2011. Concerns about Chinese growth, the elevated value of the Australian dollar and a string of weaker than expected data from Australia have all combined to keep interest rates low. The RBA has refused to rule out future cuts, though it appears that such action is unlikely in the immediate future.
The RBNZ, on the other hand has recently begun setting a timeline for possible rate hikes, thanks mostly to concerns about an impending housing bubble in New Zealand. This rhetoric puts the RBNZ in a completely different place than the RBA and helps explains the significant decline in AUD/NZD. The current Official Cash Rate in New Zealand is 2.5%, the same as Australia, but the threat of future hikes has pushed the Kiwi higher than its cousin.
All good things must end however, and there is a technical setup suggesting the possibility of a reversal or strong upside correction in AUD/NZD. We’ll get to the technical setup in a minute; first let’s discuss the fundamental underpinning of such a trade. If the market believes we have finally reached the end of the RBA easing cycle, which is a distinct possibility, and if Chinese growth fears begin to ease, we may see Aussie bulls return to the markets with a bit more confidence. Considering the length and breadth of the Aussie sell-off, it would not take too much to spark some significant profit taking, especially in a non risk-sensitive pair like AUD/NZD. While NZD rate expectations will likely remain higher than AUD for some time to come, the differential seems likely to tighten going forward.
With that fundamental background in mind, let’s take a look at the technical setup. The daily chart is showing the possibility of double bottom at (roughly) 1.12. Such a setup isn’t confirmed until the neckline of the pattern breaks, and that’s where the 1.16 figure becomes significant. The 1.16 level marks the 100 day EMA and the major neckline of the potential double bottom. Bears can sell at that level, assuming the downtrend will continue, while bulls should wait for a break and close above the figure level before going long. The measured move of longs would target 1.21, while bears would look for a trip back down 1.12. Either way, 1.16 marks a great trading opportunity for bulls and bears on AUD/NZD.
Written by: Liam McMahon, Currency Strategist – GlobalFxClub.com