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Pairs to Range Trade

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NZDUSD Offers a Volatile, Risky and Lucrative Range Setup

Thu, Mar 26 2009, 05:45 GMT
by John Kicklighter

DailyFX

The NZDUSD range that we have set up is not for the faint of heart. Not only is this pair just coming off its most aggressive rally in years; but there is significant event risk on deck that could produce dramatic volatility over the next 36 hours. However, with a reasonable time frame and the right trade setup, risk can be minimized leaving us with a very appealing range trade.

Why Would NZDUSD Hold a Range?

• Levels to Watch:
  -Range Top: 0.5750 (Trend, Fib)
  -Range Bottom: 0.4900 (Major Swing Low)

• There are both long- and short-term drivers developing behind the scenes for NZDUSD over the coming days and weeks. Immediate risk comes through the economic docket which will release the 4Q New Zealand current account and GDP numbers. Both are expected to deteriorate significantly. The US docket is comparatively light for the rest of the week but fills out after the weekend. In the meantime, this pair’s correlation to risk trends will exert a constant pressure on action.

• Looking at NZDUSD price action over the past few weeks, it may seem ludicrous to suggest we are seeing range development. Indeed, the pair was just recently put off its strongest rally in years; but this stall corresponds to a falling trend from the Oct 14th high and a long-term 38.2% Fib retracement.

Suggested Strategy

• Short: Half-size entry orders will be placed at 0.5695 well below the recent high yet a buffer.

• Stop: Our initial stop will be set at 0.5750 set well above the high and the falling trendline. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (100) at 0.5595 and the second is much further at 0.5355.

Trading Tip – The NZDUSD range that we have set up is not for the faint of heart. Not only is this pair just coming off its most aggressive rally in years; but there is significant event risk on deck that could produce dramatic volatility over the next 36 hours. However, with a reasonable time frame and the right trade setup, risk can be minimized leaving us with a very appealing range trade. To set the scene, we first have to take measure of the recent upswing which tallied 10 consecutive daily advances. More often than not, an advance of this magnitude will develop at least a moderate retracement. What’s more, looking at the bigger picture, we can see that the rally stalled at the top of a descending trend channel that begins in October. This is the symbolic boundary of the long-term bear trend (a year in development). A push through this ceiling would likely reflect a fundamental shift and trend change in this pair – something like the US dollar losing its reserve status at the G20 meeting next week. At the same time, the New Zealand GDP figure is a loaded release of its own. Due tomorrow though, we currently have enough room for the release to impact volatility without forcing a breakout. As this is a long-term channel, that is picking a top on the lower time frame, we will cancel open orders by week end or should spot hit 0.55 before our entry.

Event Risk for New Zealand and US

New Zealand – Currently the New Zealand dollar is caught between conflicting, fundamental forces. On the one hand, there are the bulls that consider the currency to have fully priced in the worst of the dour forecasts that have developed over the past 12 to 18 months. If this is indeed the case, the kiwi could be considered oversold – especially if the RBNZ decides to take the lead of its Australian counterpart and hold the target cash rate at 3.00 percent. However, New Zealand is not Australia; and the impetus for steady rate cuts is justifiable through data. This very argument will come into sharp focus Thursday afternoon when the government releases its GDP figures for the 4Q. Expected to print a 2.0 percent contraction through the year, this would seriously undermine expectations that the kiwi would stand as one of the best currencies in the event of a slow global rebound in the near future.

US – Data scheduled for release from the US docket is historically noteworthy; but its potential in current market conditions is far reduced. From the laundry list of indicators scheduled for release over the coming week, we will see indicators that will cover housing activity, consumer spending, factory activity, employment and long-term growth.
However, it is prudent to realistically project the kind of reaction each of these indicators could have on price action.
The general consensus of the US economy is a deep recession that is still on pace to further slow to its worst pace in decades. It stands to reason that market participants have priced in much of the worst for the US economy such that ongoing declines will have little net impact on overall price action. Alternatively, a modest uptick in data will not easily revive sentiment as the global downturn has turned most traders into pessimists and skeptics. The real fundamental action will follow the discussion behind the dollar’s safe haven status and the potential for the world to change its long-held reserve currency.

Published on  Thu, Mar 26 2009, 05:51 GMT