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AUDNZD recovery under review

Two months have passed since our last update (here) on the AUDNZD cross, one of our favourite trading pairs for 2019.

The length of time between our updates reflects the holiday period. It also reflects a determination to let the dust settle after the RBNZ wrong-footed the market in mid-November and elected to keep interest rates on hold despite a consensus view they would cut rates.

“For now, the sensible course of action in AUDNZD is to allow the market time to stabilise and look for signs of a base to form over the coming weeks.”

Since that point, AUDNZD has fallen over 300 points, from 1.0650 to near 1.0300 as the market unwound its long positions, seemingly exacerbated by the natural disasters currently impacting multiple regions in Australia. The impact of the bushfires on economic activity remains uncertain, more so as there is sadly a high risk of further fire damage in the coming weeks.

Economists expect the fires to result in a hit to growth in the March quarter of around -0.5% centred in the agricultural and tourism sectors before a rebuilding boost in the June quarter. Typically markets tend to look through both the negative print and the rebound caused by “one-off” natural disaster type disruptions.

Also relevant to the cross rate, AUDNZD completed a five wave decline from the 1.0865 high at the long term trend channel support ahead of 1.0300. Combined with the bullish divergence as viewed on the RSI indicator, the stage was set last week for a bounce to commence, following the better than expected housing approvals and strongest retail sales numbers in two years.

For those that took advantage of the set up there appears to be room for the rebound to continue towards 1.0500/50. However, I do feel that the easy money from this countertrend rally is now mostly gone and if at any time the trendline support at 1.0315 and 2019 lows 1.0275/65 give way, the next leg of the downtrend is likely to have commenced, targeting a retest of the 2019 flash crash low near 1.0040.

Source Tradingview. The figures stated areas of the 15th of January 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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