AUD/NZD Sell Setup Ahead Of Australian Quarterly CPI

Last week’s decline in AUD/NZD has led to a bearish engulfing candle print on the weekly chart following strong gains over the prior four weeks. The pair has fallen back below a notable resistance level, indicating a failed break. An early week recovery offers attractive levels to short the currency pair against the technical pattern high, ahead of important Australian data.

AUDNZD Weekly Oct 25
On a weekly chart, a declining channel has encompassed price action from highs posted in March. The recent four-week rally was impressive in recovering about half the decline that occurred during a nearly 6 month period from March highs. The chart shows a clear rejection at a horizontal level seen at 1.0724. The level had triggered a turn lower in July and August. With a clear bearish trend on a weekly chart, the rejection from the same level combined with a bearish weekly print suggests a broader decline is in play.

The recent rally in the currency pair came as a result of a potential divergence in monetary policy. After two rate cuts this year, the Reserve Bank of Australia has taken a more neutral stance in their policy statements, not providing direction on further easing. The most recent RBA meeting minutes indicated that the central bank will be closely watching quarterly CPI data, scheduled for release in the Asian session today. A significant deviation in the April report triggered the two rate cuts that materialized in May and August. The Reserve Bank of New Zealand remains on course in its path of easing, citing concerns of a high exchange rate among other things. There is some expectations for the RBA to continue easing, suggesting a change in course for the pair.

Shortly after former Glenn Stevens completed his last monetary policy meeting, he commented that the central bank had not been as effective as desired in their policy decisions citing the Federal Reserve as the cause. The view being, as long as the Fed holds ultra-loose policy, other economies, especially where interest rates are already high, will struggle to impact the markets. With this view, it is likely that the RBA is holding off for the Fed to raise rates in December as the markets are widely expecting, prior to easing policy further.

The CPI data release carries a higher potential to have a negative impact on the Australian currency. Comments from the RBA indicating that the bank will monitor the data to assess the impact of their easing efforts provides a small window for the data. A slightly better figure would suggest the central bank will look to continue easing as their efforts have been proven fruitful. A lower number would cause concern, and leave the markets speculating that the RBA would ease further. Only an improvement that carries a significant deviation from the analyst consensus would stand to indicate that inflation levels are moving towards the target mandate and remove speculation of further easing.

On a 4-hour chart, a declining channel is drawn connecting Monday’s low with Thursday’s low. The currency pair is seen trading near the upper bound of the channel and has been consolidating near the resistance in the early part of North American trading. The area also carries confluence with a 61.8% Fibonacci level measured from mid-October highs to last week’s lows.

AUDNZD 4H Oct 25
The first level of support in the pair is seen at 1.0572 as the level has been respected since early June. Further support is seen at 1.0528 reflecting early June lows, and resistance in late June and early July. A third level is seen at 1.0491 and is considered an important level for the pair. Multi-decade support for the pair is seen at the 1.0500 handle, and following a sharp decline from 2011 highs, the 1.0491 reflects lows from the start of 2014. The low had triggered a 10-month recovery. The take profit for the setup has been set at 1.0500 for this reason.

Resistance is seen at 1.0724. In the event of a further gain, the level is expected to hold the upside if a broader decline is to play out. The October high falls at 1.0764 and the stop loss has been set above the level. The entry will be at market.

Trade Parameters

Entry: At Market
Stop: 1.0765
Target: 1.0500
Risk to Reward: 1:2.5
Time Frame: 3-4 Weeks

Jignesh is an analyst and trader, specializing in currencies and commodities. He utilizes a macro view as well as a proprietary method of pattern recognition that is based on the principles of Elliott wave. His focus is to assess strength in trends, and perceiving high potential turning points in the markets. He brings over 4 years of experience in his current role.