A Pullback From A False Break May Offer A Good AUDNZD Range

We should be suspicious of ranges as clear as the one AUDNZD has experienced – especially when volatility is still so high. Nonetheless, with a proper setup, this pair could yield another strong range reversal.

Why Would AUDNZD Stay in a Range?

 

·         Levels to Watch:

-Range Top:       1.1475 (Range High, Fib)

-Range Bottom: 1.0875 (Range Low)

 

·         Volatility is extraordinarily high for AUDNZD, but range extremes have held up very well over the past month. This technical balance has a fundamental counterpoint as well. With the market being jostled back and forth between swings in risk aversion and appetite, we can see that these two high yielders are about evenly matched. Their benchmark lending rates have a mere 50 bps spread while both policy authorities have eased their dovish pace. What’s more, both are expected to battle recessions.

 

·         The inviolability of this pair’s technicals is absolutely essential to a successful range setup. Resistance is the more important level for our part and the range of upper wicks seen around 1.1475 finds further support from the 50% fib of the last major bear leg. Support is less important at the 1.0875 triple bottom.

Suggested Strategy

 

·         Short: Entry orders will be set at 1.1475 as a stop entry – just at the range extreme.  

·         Stop: An initial stop at 1.1550 will be immediately set on both lots for a comfortable buffer zone. After the first target is hit, the stop on the second half will be moved to breakeven.  

·         Target: The first objective equals risk (75) at 1.1400. The second target will be 1.1250.

Trading Tip – We should be suspicious of ranges as clear as the one AUDNZD has experienced – especially when volatility is still so high. Nonetheless, with a proper setup, this pair could yield another strong range reversal. Our strategy looks to get in at the extreme of the pair’s range and the stop is set far enough above this ceiling that it should give a good buffer to anything but a genuine breakout (while keeping the potential for loss on the trade at a reasonable level). However, the chance at a breakout is very high; so only traders with a high risk tolerance should even consider this setup. The close of Wednesday’s candle is the highest since the range began back on October 10th and spot was pushing resistance as this article was being written. Therefore another strategy that can be taken to reduce risk is to hold the limit entry orders as stop orders on a reversal.  This would ensure the market is pulling reversing course before a range trade is even entertained (and thereby avoiding a potential breakout in the making). All orders will be canceled should spot hit 1.16 or by week’s end.

Event Risk Australia And New Zealand

Australia – Fundamental event risk is certainly picking up for the Australian docket; but the major data won’t start crossing the wires until next week. Tonight, the Conference Board is expected to release its leading indicators composite index; but this growth forecast report is being introduced to an already bearish market and it’s wrap up of August event risk gives us little to work with in terms of current data. The real market movers begin Monday with the 2Q retail sales report. With the economy heading into recession, the focus on the consumer sector (the biggest component for growth) will intensify. Should spending falter, the hope for a modest cooling will quickly fade. Later on, the employment change will offer another consumer read. A very tangible indicator, the clear good/bad nature of this release will give it momentum. Without doubt, the RBA rate decision is the top indicator for the week. After the 100 bps cut at its last meeting, this follow up policy decision will verify whether they are actually looking to ease up on their aggressive moves.

New Zealand – Event risk on the New Zealand docket is significant enough that it may spark price action when the broader market is still more concerned about overall risk trends. Demand for a safe haven for capital is damped for the kiwi when matched up against the Australia dollar, but the kiwi is still considered the bigger risk when volatility isn’t a factor. Offering a more predictable measure of event risk, the docket will also offer up a few market movers of its own. This morning, the NBNZ business confidence indicator will measure the recession from the standpoint of the business owner – the first to respond to this sharp drop in economic activity. Labor costs for the third quarter will be read as a growth indicator rather than inflation (the reverse of which would have been true six months ago). And, the top event risk is the 3Q employment change. Though it has a shaky history, it does measure the all important consumer.

Data for October 30 – November 6

 

Data for October 30 – November 6

Date

Australian Economic Data

 

Date

New Zealand Economic Data

Oct 29

Conference Board Leading Index (AUG)

 

Oct 29

NBNZ Business Confidence (OCT)

Nov 2

Retail Sales (2Q)

 

Nov 2

Labor Cost Private Sector (3Q)

Nov 3

RBA Rate Decision

 

Nov 5

Employment Change (3Q)

Nov 5

Employment Change (OCT)

 

 

 

 

 

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.