AUDNZD: Can the RBNZ Put the Brakes on the Rally?

Much like the USDJPY, which we discussed at length earlier today, the AUDNZD has been rangebound for most of 2014. In its case, the antipodean pairing has been finding consistent support in the 1.05-1.06 area and resistance between 1.09 and 1.10. While sideways trade is hardly ideal for longer-term buyers or sellers, bulls will certainly agree that 2014 has been an improvement over 2012 and 2013, when the typically-staid pair fell over 2400 pips in 24 months. Indeed, there are growing technical signs that rates may be carving out a significant long-term base within the current range.

Because both Australia and New Zealand are affected by many of the same global economic trends, differences in relative monetary policy and interest rates are the primary driver of the AUDNZD exchange rate. To that end, the upcoming Reserve Bank of New Zealand monetary policy decision coming could set the near-term tone for the pair. As my colleague Chris Tedder discussed yesterday, the central bank is likely to raise interest rates by 25bps one last time before pausing its rate hike cycle for a few months. Relative to the market’s expectations though, there is a small risk that the bank could be more hawkish than expected, which could lead to a pullback in the AUDNZD.

From a technical basis, we noted a key area of resistance on twitter earlier today:

As the chart below shows, 1.0875 is the critical resistance level to watch. Technical traders will be hyper focused on this area, as the AUDNZD has not traded meaningfully above its 200-day MA since August of 2012, and then only briefly. The secondary indicators are generally supportive, with the RSI rising within its own bullish and the MACD trending higher above the signal line and the “0” level, but given the importance of the 1.0875 level, we’re treating the rally with skepticism until/unless rates can rise through that barrier.

If we do see a bullish breakout this week, a move up to the 78.6% Fibonacci retracement at 1.0945 or the previous highs near 1.1000 becomes more likely. On the flip side of the coin, a more-hawkish-than-expected RBNZ could reverse the recent rally for a move back down toward 1.0800 or 1.0700 in the near-term.

Source: FOREX.com