Weekly Strategy: Kiwi heads and shoulders below the rest? by Senior Currency Strategist Daniel Hwang...posted May 22, 2012 at 0110ET
Last Friday, EUR/USD fell to lows slightly above 1.2640 before sharply reversing higher. However, the move down to the most recent 1.2640 lows hit the H&S measured move objective (see below April 19, 2012 Weekly Strategy Update) and final limit target from the MARCH 9 2012, 0314ET...WEEKLY STRATEGY: 'Don't buy the rumor, sell the irrational exuberance' at around 1.2650 for a potential reward of about +585 pips, also updated in the most recent FX VIEWS: BEATING THE STREET STRATEGY TRACKER.
PIIGS get slaughtered?
At the moment, EUR/USD hovers just above the 1.2800 figure as expectations of further policy easing from global central banks sees USD offered across the board. Fundamental risks to a sustainable global economic recovery still remain with the possibility of Greece exiting the Eurozone being the most immediate. The most threatening risk to the global economy, however, is the potential for EZ peripheral debt contagion resulting in not just the PIIGS getting slaughtered but risk assets overall taking a beating.
Risk back on or short covering?
Despite the rebound in G10 and EM FX vs. USD over the past two trading days, it’s hard to believe risk being put back on the table considering the heavy spate of data/events in the month ahead – BOJ meeting & more importantly EU meeting on Wednesday, US GDP and NFP next in a few weeks, and Greek elections mid-June. Short covering seems to be the main driver of recent USD weakness and the seemingly improving Franco-German relationship – Germany’s Merkel said yesterday that France’s Hollande’s proposals were ‘sensible’ solutions to Europe’s debt crisis – may lead to further short covering.
Central banks on the front line
All of the above-mentioned data/events are crucial to market direction in the 2H ’12 due to its implications for monetary policy globally – extremely negative news-flow may see some initial spikes lower in risk but would ultimately lead to a rebound in risk assets and USD downside on an eventual implementation of QE3 and/or possible coordinated global intervention. However, the time to buy dips in risk hasn’t arrived just yet. US economic data, while mixed of late, has outperformed data out of Europe and traders are unlikely to take on large positions until Greek election results are out.
Weekly Strategy: Kiwi heads and shoulders below the rest?
NZD/USD fell off a cliff over the past 3 weeks. The Kiwi plunged versus the buck from highs near 0.8240 to lows just above 0.7520, just barely hitting final limit targets adjusted to 0.7525 in the MARCH 7 2012, 1800ET...FX VIEWS - NZD/USD update - Dovish RBNZ may provide intraday value for kiwi shorts for potential NZD/USD short positions at around 0.8375 initially posted on FEB 15 2012, 0345ET...FX VIEWS: A diamond in the rough for kiwi shorts?.
The RBNZ’s more dovish policy stance on intensifying external and domestic economic conditions has been the main driver behind the precipitous free-fall in NZD/USD. Markets have started ‘pricing in’ a hike to the OCR further out but have not quite ‘priced in’ rate cuts. We think this is a real possibility as suggested by commodity price downside and declining domestic consumption in China.
Technically, NZD/USD is in the midst of a potential H&S pattern on weekly charts; a break below neckline support around 0.7525, at the moment, projects a measured move objective to around the 0.6000 figure. On shorter term charts (see 4HR chart inset), the 50 pip false breakout below downtrend channel support suggests the most recent break above channel resistance may be false as well.
As both technical and fundamental indicators suggest further NZD/USD downside remains, we think reward: risk value favors kiwi shorts – Potential NZD/USD shorts for half a position at around 0.7680 with the remaining half on a potential retest of broken uptrend support around 0.7830 for a final average rate of 0.7755 with stops above triangle consolidation resistance at around 0.8255 for a total risk of about -500 pips and limits targeting a move above the H&S measured move objective at around 0.6255 for a total potential reward of +1500 pips may provide a 3:1 reward to risk opportunity.