In a Less Volatile World, AUD and NZD Will Rally

01/09/2015 9:00 am EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

For Adam Button, of ForexLive.com, when it comes to the markets—including forex—it all comes back to yield, so he demonstrates why, technically, this currency pair is showing signs of a bottom and why there may be reason for some “Thunder Down Under.”

Yield is the driving force in markets, including foreign exchange.

The economies in Australia and New Zealand might not be booming the way they used to be but the carry trade is endlessly attractive.

Over the past week, in days of risk aversion and risk appetite, the high yielders—especially NZD—have outperformed. The kiwi is the best performer this year and the aussie is third (after JPY).

The days of central bankers in Australia and New Zealand lamenting unfair exchange rates probably aren’t over but they’re nearing the end. Technically, NZD/USD is showing signs of a bottom.

chart
Click to Enlarge

The chart shows:

  • The first higher low (or a double bottom)
  • A break of 0.7847 will mark a higher high
  • A break of the downtrend will point to gains

Overall, it comes back to yield. A New Zealand 10-year government bond—although it’s illiquid—pays 3.6% compared to 2.02% in the US, 0.51% in Germany, and 0.29% in Japan.
That’s a powerful force.

As of Thursday, for the Australian dollar, Chinese CPI data is only a few hours away and a low reading will renew enthusiasm about rate cuts. Technically, there is also reason for excitement.

By Adam Button, Editor, ForexLive.com

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