AUD/NZD a pair to watch

AUD/NZD has been getting some attention from traders today with the pair testing multi-decade support levels.

New Zealand Dollar
Source: Bloomberg

As seen on the monthly chart, AUD/NZD had been climbing through the year, but saw good supply at the 23.6% retracement of the 2011 to 2013 sell-off, at NZD1.2363. As noted, the selling has seen the pair reverse and come down to strong support around the NZD1.05 area. Clearly the fundamentals have driven this move, with the Australian economy showing enough vulnerabilities for the markets to price in a rate cut over the coming 12 months, while bond yields in Australia are effectively below the current cash rate out until five-year maturities.

The question is, has the market got too optimistic on Aussie interest rate expectations and in turn is AUD/NZD a buy off key long-term support?

It has to be said that while the pair is at extremely strong horizontal support, the trend is clearly lower and the various oscillators (on all time frames) are suggesting rallies should be sold. There are no signs of glaring divergence and therefore signs of a major impending reversal, but as we have seen since 1997, AUD/NZD has found very good buyers around the NZD1.04 to NZD1.05 area.

Personally, I don’t like to fight such strong trends and would be looking favourably at
GBP/AUD longs on a pullback. However, there is a no denying that
AUD/NZD has caught a few traders attention, given the strong support levels currently being tested.

A pair to watch, but while the pair is a buy from a risk to reward perspective, the upside would probably be capped at the 20-day moving average at NZD 1.0711.

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