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Hedging Range Trades

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Australian Dollar to Rise Against Kiwi, Hedge Offers Entry

Thu, Jun 26 2008, 08:35 GMT
by Ilya Spivak

DailyFX

With RBNZ Governor Allan Bollard stating for the first time since 2003 that a rate cut is in the cards for the end of the year while the Reserve Bank of Australia is sure to keep rates on hold to tame inflation, it is not surprising that the Australian Dollar has rallied decisively against its New Zealand counterpart. Thursday’s New Zealand GDP release for Q1 is expected to come in negative for the first time since 2005, further cementing the need for monetary easing. While Australia too has shown signs of weakness in May's employment data (jobs shrank by -19.7k versus an expected increase of 13.5k), the rhetoric from Governor Glenn Stevens and his cohorts clearly suggests that they still view inflationary risks as biased to the upside, meaning a rate cut remains a distant proposition. On balance, this can be expected to keep AUDNZD firmly along its current upward trajectory in the near to medium term.

AUDNZD price action has been confined to a clearly-defined channel since March. Current price action sees the pair on a path to test resistance in the coming days, suggesting a reversal lower will be soon to follow. The Slow Stochastic oscillator has entered overbought territory above the key 80 level. We expect to see the oscillator begin topping out as resistance is tested, with a subsequent correction lower within the channel's boundaries.

Hedging Strategy

Currency Pair: AUDNZD

Long Term Bias: Bullish
Long Term Position: Holding Long

Short Term Bias: Bearish
Short Term Position: Short below 127.28, Target 124.32, Stop-Loss at 128.19

Traders looking to protect their existing long AUDNZD position or enter long at a favorable price may consider a hedge short AUDNZD below 127.28 with a target at 124.32. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should AUDNZD break out to the upside prior to the limit being hit. We will set the stop-loss near 128.19.

When should I use the hedging feature?

Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.

The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.

For more information on FXCM hedging strategies please visit http://www.fxcm.com/hedging.jsp.

Published on  Thu, Jun 26 2008, 08:39 GMT