$AUDNZD - Scope for a further recovery leg higher

Monday, March 3, 2014 Posted by TFAL Team

Spread stabilisation may assist recovery higher

Since last year focus has turned to the Australian current account. This has begun to show signs of improvement. In particular, if we examine the trade balance we can begin to see some signs that the weaker currency is beginning to have an impact. Combined with a small rise in CPI QoQ, yield expectations for Australia have stabilised for the time being. This compares with New Zealand where the RBNZ, who are keen to raise rates to cool down a rampant housing market, now fear an overvalued currency. I believe that the small price swing under 1.0500 in AUD/NZD, marked an extreme in AUD bearishness and NZD bullishness, both of which are being reassessed by the market. Although this may not equate to a longer

term trend reversal, I note, at major swing lows/highs the fundamentals are rarely aligned to suggest an imminent turn. I thus see scope for a further recovery from the annual low and look to continually update my view as the facts change. For now further upside remains favoured.

Monthly hammer candle for January buoys longer term prospects

AUD/NZD completed a bullish hammer candle for January, in the monthly time frame. This bodes well for the longer term prospects of this pair. i now see the beginnings of a possible reversal pattern forming, which would be triggered on a break back over the recent high at 1.0948 (04/02/2014 high). Should this scenario be realised we would anticipate an eventual return to the 1.1500 region, close to the current level of the 50

week moving average, which rests at 1.1463. This has long been a favourite trade of ours, with the 1.0500 region offering significant support. We would thus look to initiate long positions from the current region, with an associated stop under the annual low at 1.0493 (24/01/2014). Alternatively, for those interested in momentum/confirmation, if a break were to occur over 1.0948, this could also be bought, with a possible stop under the most recent key low, which has yet to be formed.