For quite some time, we have seen a significant downtrend in the AUD/NZD pair. However, this changed a few days ago as the Royal Bank of New Zealand suggested that its next move could very well be a rate cut. This deluge surprise certainly has put the New Zealand dollar on the back foot against many other currencies around the world, and of course the Australian dollar isn’t going to be anything different.
Trendline
As you can see on the chart, there’s a nice trend line drawn that we are currently testing. This is obviously an area that is going to attract a lot of attention, and beyond that we have tested it a couple of times already. With that in mind, a break out above the 1.05 level would probably bring in fresh money to the Australian dollar. On the other hand, if we cannot break out to the upside it’s very likely that we will continue to see a downward trend, but with the recent surge higher, one would have to think it would take a lot of work to resume the downtrend after the last couple of days.
AUD/NZD
In the meantime
In the meantime, it looks as if we are simply treading water underneath a couple of major barriers, not only the 1.0450 level, but also the psychologically important 1.05 handle. The trend line of course will come into play, and over the last several days we have seen a sawtooth pattern emerge, which simply means the market is biding its time. This quite often will happen before break out, as you need a certain amount of effort to break through what would be obvious resistance. Once we do get that break out though, things could get interesting.
To the upside
To the upside, I could easily see how this market would go looking towards the 1.07 area, which was significant resistance previously. More than likely we would probably go much higher, especially if we get some type of trade deal negotiated between the Americans and the Chinese. After all, the Australian economy is highly levered to the Chinese economy, and of course supplies China with much of its raw materials necessary to manufacture goods for the rest the world. In fact, it’s quite common for traders to use the Australian dollar as a proxy for the Chinese economy itself.
To the downside
If we do break down from here, then it’s very likely we will go looking towards the 1.03 level, and then probably lower than that. That after all has been the overall trend so it would make sense for that we continue had the central bank in Wellington not changed its tune so much. Because of this, it looks as if we are starting to see some fundamental difference in the New Zealand dollar overall, and of course with the soft outlook for the New Zealand economy, although it does weigh upon the Australian dollar this is a relative strength play.
AUD/USD and NZD/USD
Do not forget the role of the US dollar in the Forex markets. If the markets are to be looked at in a holistic manner, it’s easy to see that the AUD/USD pair has outperformed the NZD/USD pair as it has such a strong support base at the 0.70 level. Because of this, it’s very likely we will see a break out as the Australian dollar is stronger from a relative strength perspective.
