AUD NZD arrives at key technical juncture

The AUD/NZD’s recent depreciation is mainly due to a surprisingly dovish RBA, which decided to follow the footsteps of the RBNZ by cutting interest rates. At 2.25%, interest rates in New Zealand are still one of the highest among the developed economies. In Australia, they are now at a fresh record low of 1.75%. The 50 basis point difference makes the NZD a more attractive currency than the AUD for yield-seekers. But it is not just about the current interest rates that impact a currency pair. Rather, it is the changes in expectations about the future path of interest rates that drive the markets. These expectations continually change for a number of reasons, including incoming domestic economic data, central bank comments, significant fundamental developments in the economies of their trading partners and, in the case of AUD and NZD, changes in key commodity prices.

So, there’s a lot to consider when deciding on a trade. But today we will leave the fundamentals to one side as most of these macro factors are reflected in the charts anyway.  From a technical point of view, the daily chart of the Aussie-Kiwi shows that after breaking below several barriers, price has now reached the rising trend line around 1.0740, which is also where the 78.6% Fibonacci retracement level of the most recent rally comes into play. Unsurprisingly it has bounced here, in part because of profit-taking from the sellers.

Having defended the bullish trend line, the AUD/NZD was trading around the prior support area of 1.0800/20 at the time of this writing. Will this level turn into resistance now or give way for a more significant rally? If price breaks decisively above this level then the short-term trend would turn bullish in what essentially is still a range-bound market. In this potential scenario, the unit may initially rise towards the 200-day moving average at 1.0925. Further potential upside targets include the broken support level at 1.1030 followed by the bearish trend line around 1.1200.

Alternatively, if the AUD/NZD breaks below the bullish trend line then it may pave the way for further follow-up selling pressure towards at least the prior lows of 1.0575 or the long-term pivotal and psychological level of 1.0500 before it decides on its next move.

Whatever the AUD/NZD does next, it should provide clear trading opportunities. So it is a pair definitely worth watching for ideas this week, especially with some key New Zealand data coming up (RBNZ financial stability report and retail sales).