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My favorite forex trade right now is shorting AUD/NZD.
After hitting a 9 year high of 1.3124 last week, the rally in AUD/NZD is losing steam. I should have posted about this earlier, but I think there is still room for the currency pair to fall.
Last week, the Reserve Bank of Australia raised interest rates by 25bp to 4 percent but hinted that from here on forward, they will begin to slow down their pace of tightening. Having already doled out 80 to 90 percent of their planned rate hikes, the focus will now turn to the RBNZ who has not even started to raise interest rates. Granted, the Australian economy is doing far better than the New Zealand economy, it is time for New Zealand to catch up. In January, New Zealand turned its first trade surplus after 7 months of consecutive deficits and in February, business confidence hit a 10 year high. Yes my friends, a TEN YEAR HIGH. With numbers as strong as these, the Reserve Bank of New Zealand will most likely grow more hawkish, paving the way for a rate hike later this year.
Furthermore, 25% of New Zealand’s exports go to China and 25% go to Australia. Therefore the combination of higher commodity prices and strong growth in NZ’s most important trade partners should encourage the RBNZ to adopt a more optimistic tone when they meet later this week.
Finally AUD/NZD presents a good risk reward opportunity from a technical basis. It is currently trading at 1.2975 and if it rallies back above 1.31, the uptrend has resumed. Otherwise, there is no major support in AUD/NZD until 1.2775
Switzerland has officially adopted a beggar thy neighbor policy approach by intervening in the currency market. This morning, they cut interest rates by 25bp to 0.25 percent matching U.S. levels. They have officially embarked on Quantitative easing and will be buying domestic and foreign bonds (fully synopsis of SNB rate decision) .
For currency traders, this means that a BIG seller of Swiss Francs have just entered the market. They have deep pockets and will probably be in the market for a while. Therefore, expect more losses in EUR/CHF and USD/CHF, both of which have hit 2 month highs. Such a strong move begs a correction but ultimately, I believe that EUR/CHF will hit 1.55 and USD/CHF will break 1.20.
The US retail sales report was much stronger than the market expected and this should add to the gains in USD/CHF, which has already outperformed EUR/CHF this morning.
There are still unanswered questions such as how much Swiss Franc the SNB will sell, the scale of bond purchases and additional liquidity. Their announcement today is aimed at accomplishing 2 goals at their expense of their neighbors which is protect their export sector and prevent the economy from falling into a deflation trap.
After the Bank of Canada cut interest rates by 50bp this morning, my target of 0.8350 in AUD/CAD has been reached. Yesterday, when the currency pair was trading at 0.8122, I argued that the possibility of the Reserve Bank of Australia leaving rates unchanged and the possibility of the Bank of Canada being more dovish would drive an upside breakout in AUD/CAD.
As for the Canadian dollar, I am still looking for it to fall to 1.30 against the US dollar. The rate decision has already driven USD/CAD to an 11 week high.
Not only did the Bank of Canada cut interest rates, but they talked about Quantitative Easing AND further rate cuts. Next stop for Canada is zero interest rates!
As for the Australian dollar, their “surprise” decision to leave rates unchanged should not have been much of a surprise to my readers as we talked about it yesterday. Over the past few weeks, comments from RBA officials have been surprisingly optimistic which should have been a signal for all traders that leaving rates unchanged is an option. Last night, RBA Governor Stevens said that There has already been a major change in both monetary and fiscal policy. The board will consider the position again at its next meeting.” In the RBA’s eyes, they have done alot. They are not closing the door on further rate cuts, but for the time being, they want to give the economy time to absorb the government’s aggressive fiscal and monetary stimulus.
The EUR/USD has fallen close to 4 percent or 600 pips since the beginning of the year. Although fundamental factors are certainly in play, there are seasonal factors as well.
Back in December, I published article warning about the seasonal effect on the EUR/USD.
Looks like it is playing out as expected:
One of the new chapters in my book, Day Trading and Swing Trading the Currency Market, Second Edition is on seasonality.
Technical analysis is based on the idea that price patterns repeat themselves and seasonality is rooted from this very same concept.
According to the following chart, over the past 10 years the EUR/USD depreciated in the month of January 7 times. If we expand the chart to include 1997, which I cover in the book, that would be 8 out of 11 times.
Of course, like all technical analysis, the pattern does not always repeat itself which is why we saw the EUR/USD rise in the month of January during 2003, 2006 and 2008.
For an explanation of why there is a strong case for seasonality in the currency market during month of January and for other examples of seasonality, treat yourself to a copy of second edition of Day Trading and Swing Trading the Currency Market