AUD NZD gearing up for a breakout above 1 13

Given the increased uncertainty about the Fed’s decision, conservative traders may wish to avoid the US dollar altogether this week and instead speculate on a FX cross. One such pair that is catching my attention is the AUD/NZD, which could be on the verge of a big breakout.

In addition to technical reasons boosting the probability of a breakout, as discussed below, the fundamental picture is also turning bullish for the AUD/NZD due to the reduced disparity between monetary policies of the two nation’s central banks.  The RBNZ has dropped its previously hawkish stance and has reduced interest rates at the past four meetings. In contrast, the RBA has kept its policy unchanged since cutting interest rates to 2.0% in May. And while the RBNZ has hinted it may cut rates further, the RBA has stopped its verbal intervention.

That being said, the RBA’s last policy meeting minutes, due for release in the early hours of Tuesday, may produce a few surprises that could weigh on the AUD. Later on in Tuesday’s session, there will be the Global DairyTrade (GDT) auction at which we will find out about the change in the weighted-average price of the 9 dairy products that are very important for New Zealand’s exports, and in turn, its currency. Then, on Thursday morning in Asia, we will have the second quarter New Zealand GDP estimate, followed by a speech by the RBA Governor Stevens on Friday.

So, there are plenty of macro events to look forward to for the AUD/NZD. But from a purely technical point of view, the AUD/NZD looks like it wants to break higher after spending the past 2.5 months in a relatively consolidation range between 1.0900 and 1.1425. At the moment, price is holding above all its main moving averages (50, 100 and 200 day SMAs) and comfortably above resistance-turned-support level of 1.0900. A bullish trend line is also now in place. Significantly, the most recent pullback off the high has stalled ahead of the shallow 38.2% Fibonacci level (1.0890), suggesting that the bulls are pretty much in control. A shallow pullback is usually indicative of a sharp breakout.

The bulls will now want to see a decisive closing break above 1.1300, a level which had been sturdy resistance in the past. The most recent breaks above 1.1300 were almost immediately rejected and today’s rally has also come to a bit of a halt around this key level. But things look and feel different this time around. As well as the bullish indications described above, the AUD/NZD has also taken out a bearish trend line and the breakout has been confirmed by a bullish crossover on the momentum indicator MACD. If price manages to break higher as it looks like it might, then the first potential target for the bulls would be the previous high around 1.1425. Thereafter are the long-term 38.2 and 50.0 per cent retracement levels at 1.1460 and 1.1905, respectively.

The bears meanwhile will want the AUD/NZD to first and foremost break short-term support at 1.1260 and more importantly the bullish trend line, around 1.1000. If the trend line breaks, they may then aim for that 1.0900 handle; this will be the pivotal level as for as the near-term direction is concerned.