AUD / NZD SHORT TRADE ANALYSIS

Earlier today, the Royal Bank of New Zealand's rate decision came in with no surprises. The RBNZ held rates at 2.50% in line with analyst expectations; the kiwi sold off against the US dollar right after the release. A few hours later, the scheduled Australian jobs data came in lower than expected with Australia only adding 400 jobs as opposed to a forecast of 15,000. AUS/USD sold off initially from around 0.9150 down to 0.9120 but reclaimed pre data levels a few minutes later.




In the meantime, AUD/NZD has been trading in “all time” high territory for a few days now. The Pair is currently trading above 1.30 with multi year highs just below 1.32

Fundamentals:

Australia has been benefiting from steady Chinese demand for its commodities over the past 12 months and that has helped the economy rebound strongly. On the other hand, there are reports and signs that the Chinese will begin to tighten monetary policy to combat inflation and avert bubbles. Two days ago, Chinese authorities signaled that they may let the Yuan appreciate (one way to combat inflation is via currency appreciation). Lastly, Chinese CPI and PPI data just hit the wires less than an hour ago and Core Inflation came in at 2.7% versus the 2.5% forecast. A slowdown in Chinese expansion will have a significant effect on the Aussie economy. Eternal Market Analysis believes the Aussie dollar will slow its pace of appreciation and probably pull back  (at least in the near term) especially against its antipodean counterpart - the Kiwi.



Technicals:

The probability of a short trade is enhanced when initiated at resistance…remember the old saying..”sell at resistance”. As I mentioned earlier AUD NZD is currently trading within solid resistance zone / multiyear highs.

In December of 2005, AUD NZD bounced off 1.0480 (point 1 on chart below) and started an uptrend that temporarily topped out at 1.2440 in July of 2006. The correction of the 1.0480 to 1.2440 advance exceeded the 61.8% retracement down to 1.0938 (point 3) – July 2007. The next wave up began off the 1.0938 level and made a new high around 1.2950 (point 4) in July of 2008.

The next wave down in AUD NZD from the July 2008 high was aggressive and coincided with the onset of the recession. The decline retraced over 100% of the advance from 1.0938 and bottomed out just above 1.06 . The advance from 1.06 puts us at the new highs set at around 1.31 (point 5) just a few days ago. AUD trades just above 1.3050  against NZD and we believe a “multi pip” retracement in just around the corner.

Also, we expect this retracement like others with this pair over the past 5 years to exceed at the 61.8% advance from 1.06 (which equals 1.16.)



Trade Plan:



Short 2 Standard Lots of AUD NZD @ 1.3080 & Short 3 Standard Lots of AUD NZD @ 1.3120 if prices advance that high again prior to the decline.

This will put a fully triggered trade @ 5 lots short at an average price of 1.3100

AUD NZD $ Value / pip = $7.00 for each lot

Stop Loss or Risk for this trade is 300 pips = 1.3400



Profit Target is as follows:

Using Last in, last out:

Target 1: Take profits on 2 units sold at 1.3080 at 1.2480 (600pips)

Target 2: Take profits on another 2 units at 1.2200 (900 pips)

Target 3; Take profit on 1 unit at 1.1599 (1501 pips)

Total pip potential = 3001 pips

Move stop loss to break even once initial profit target its hit.