Is the AUD/NZD Pair Ready to Breakout?

08/29/2008 12:00 am EST

Focus: FOREX

For the past two weeks, the AUD/NZD pair has been range bound; but with the market expecting the Reserve Bank of Australia to cut next week, there is a good probability of a breakout sometime next week. Technically, there seems to be debate in the market as to whether this pair is holding with the bullish trend from the beginning of the year or if the pull back from July's swing high has officially changed the trend. This has left the pair wedged between the 38.2% and 50% retracement levels of the March 21st to July 24th advance at 1.2350 and 1.2150 respectively. A close above or below either level would be strong (perhaps cautious) confirmation of a turn to a breakout.

Trying to forecast direction diminishes the probabilities of a successful trade; but considering the event risk on the horizon, it is reasonable to expect volatility and an increased potential for a breakout. While the New Zealand docket is barren; the Australian calendar holds a current account balance, GDP release and, most important of all, an RBA rate decison.

Both of the quarterly indicators are expected to cool; but the policy decision is the real focus as a quarter-point hike is heavily expected. This suggests it is heavily priced in (index swaps show expectations of 100 bps of cuts through the next year); but there is still room for uncertainty. If there is no change, a bullish advance will no doubt take off, though it would be short lived as the central bank has already said it would ease sometime in the future. If there is a cut, any statement would be a backup driver as it would confirm or deny expectations of multiple cuts through the end of the year. This will significantly impact interest rate expectations, which are key to this pair. There is little impact to AUD/NZD from risk trends as there is little carry and the economies are similarly tied to commodities. This means there is little correlation to the rest of the currency market, a good thing for diversification away from the all encompassing trends across most of the market.

By John Kicklighter, Currency Strategist for DailyFX.com

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