AUD/NZD preparing for potential major bullish breakout after years of consolidation
AUD/NZD could be set to emerge after years of consolidation, with commodity and treasury moves highlighting a potential bullish reversal in 2021.
AUD/NZD, commodities and treasuries bring correlated influence
AUD/NZD has been on the rise over the course of the past three weeks, bringing the pair into a notable ascending trendline. Today’s surge in metal prices does highlight the case for AUD outperformance, as traders prepare for a long-term commodity super-cycle. The reason that this pair is so interesting is that both Australia and New Zealand are heavily reliant on commodity exports to China, yet the types of product are very different. While Australia is expected to see significant economic strength as a global push towards manufacturing drives metal demand sharply higher, New Zealand is more reliant on soft commodities such as dairy. Given how aligned metal prices are to the global economic picture (Doctor Copper), the economic recovery should bring about significant upside for metal prices and thus the Australian dollar.
Given the fact that treasury yields are often tied with economic recoveries, the relationship between yields and AUD/NZD can provide us with a key clue for the longer-term picture. The chart below highlights that correlation between US 10-year treasury yield and the AUD/NZD currency pair. Adding the 50-week SMA for AUD/NZD, we can see how a smoothed-out version of the pair correlated very well with the 10y yield. Given the expectation that we will likely see yields rise over the course of the year, this provides the basis for a bullish long-term AUD/NZD view.
The monthly chart highlights the downtrend we have seen in place since the 2011 peak. Interestingly, the last long-term uptrend for this pair took place in the years following the 2007/08 financial crisis. Notably, the price action has failed to really maintain that bearish trend over the recent years, with the price instead seemingly consolidating. However, that consolidation could be a long-term base being formed, with the recent break through 1.0866 bringing a potential initial bullish signal for the pair. That new higher high signaled a likely higher low coming after. With the price rising from a 61.8% pullback, it looks like we could yet bring about a bullish breakout through 1.1045 in the coming months.
From a daily perspective, the pair is challenging a descending trendline here, with the price rising through the 76.4% Fibonacci level already. That break raises the likeliness of a bullish breakout through this trendline as we head towards the key 1.0842 level.
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