RBNZ prevent the bird from lift off - AUDNZD

Yesterday we asked if the RBNZ could strike the right chord between imparting cautious optimism following the economic uplift from the earlier than expected relaxation of social distancing restrictions. Verse the negative impact from closed international borders and at the same time keep the NZ currency grounded.

Charts (4)

As expected the RBNZ left interest rates on hold at 0.25% and kept their Large Scale Asset Purchases program (LSAP) steady at $60bn. A firm dovish tone was wound into the text of the accompanying statement as the RBNZ highlighted that “the balance of economic risks remains to the downside”.

The RBNZ also noted that while fiscal stimulus was providing the main support for the economy, the RBNZ stood ready to provide additional monetary stimulus, alluding to a possible expansion of its LSAP as well as the use of negative interest rates.

In a warning to currency traders that the 4.5% appreciation in the NZ Trade Weighted Index (TWI) over the past six weeks had not gone unnoticed “The appreciation of New Zealand’s exchange rate has placed further pressure on export earnings.”

It is important to remember that the NZ TWI, a weighted measure of the currencies of New Zealand’s trading partners is of more importance to the New Zealand economy than the NZDUSD rate.  The Australian dollar accounts for a weighting of 20% and is second only to the Chinese Yuan (21%). On the third rung is the U.S. dollar with a weighting of 13%.

The reason I highlight the importance of the TWI is the AUNZD cross rate is firming in interest from a technical point of view. As seen on the 4hr chart below, AUDNZD is on the verge of confirming a break above the neckline of an inverted head and shoulders bottom.

The implications of this are should the current 4hr candle in AUDNZD close above the neckline (1.0730ish) it would suggest the cross is set to move higher and the trigger to consider entering longs in AUDNZD.

The stop loss would be placed initially below 1.0679 with a view to trailing it higher to 1.0710 if AUDNZD rallies towards 1.0800. The target for the trade is a retest and break above the June 1.0881 high.

RBNZ prevent the bird from lift off AUDNZD

Source Tradingview. The figures stated areas of the 24th of June 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

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.