NZDUSD Pares Gains, Offers Range Trade Opportunities

As liquidity drops in the currency market through the last two weeks of the year, the likelihood of a NZDUSD breakout is minimal. With volume steadily falling, volatility is likely to increase throughout the market, but the lack of momentum behind previous trends paired with risk aversion should hold the pair within range throughout the coming weeks.

Why Would NZDUSD Hold a Range?

·Levels to Watch:

-Range Top: 0.6100 (Trend, SMA)
-Range Bottom: 0.5200 (Double Bottom)

·Amid an eventful US calendar, liquidity tends to drop significantly during the last two weeks of the year as traders round-trip their open positions ahead of the holiday weekend. As trading volume tapers over the next two weeks, a major breakout is highly unlikely, and the NZDUSD should hold its broad range through thin markets.

· The NZDUSD snapped back last week to cross above the 21.4% Fib and the 50 Day SMA, but the lack of momentum to push higher has held the pair in a downward trend. On 12/18, we saw the NZDUSD surge to an intraday high of 0.6086, but failed to hold its gains as the pair ended the session lower, which suggests that forex traders remain bearish against the pair.

Suggested Strategy

·Short: Half sized entry orders will be set at 0.5650 – the 50 Day SMA

·Stop: An initial stop at 0.5790 is sufficient as trading volume plummets. To secure profit, move the stop on the second lot to breakeven when the first target hits.

·Target: The first objective equals risk (140) at 0.5510. The second target will be 0.5350.

Trading Tip – As liquidity drops in the currency market through the last two weeks of the year, the likelihood of a NZDUSD breakout is minimal. With volume steadily falling, volatility is likely to increase throughout the market, but the lack of momentum behind previous trends paired with risk aversion should hold the pair within range throughout the coming weeks. Moreover, as the interest rate outlook for the New Zealand dollar dwindles, the probability for an upside surprise is negligible. The strategy discussed holds in line with the dominant bear trend, and takes into consideration the impact of the fundamental event risks scheduled for the week. We will cancel open orders before the New Year or should spot hit 0.6000 before we initial a trade.

Event Risk New Zealand and US

New Zealand – The third quarter GDP reading scheduled for Monday will play a key role for our short NZDUSD trade as economic activity is expected to contract further throughout the second half of the year. As growth prospects deteriorate at a rapid pace paired with easing price pressures, the interest rate outlook for the New Zealand dollar is likely to weaken further as the $128B economy faces its worst recession in 18 years. Meanwhile, the M3 money supply release has had little or no impact the past, nevertheless traders may react to the release as the global economic calendar remains fairly light for the week beginning December 29th.

US – The event risks scheduled for the US is likely to spark volatility throughout the forex market as the economic docket is filled with tier-one data. The final 3Q GDP reading scheduled for Tuesday will kick-off the slew of market moving data for the week, and a remarkable revision in any of the more important component readings could certainly weigh on the dollar as growth prospects deteriorate.

Also due that day is a trio of housing indicators. Housing prices, new home sales and existing home sales will give a broad reading on the original catalyst for the economic downturn. The likelihood for an enhanced reading remains bleak as credit conditions remain far from normal. Meanwhile, as investors continue to curb their appetite for risk, the greenback could benefit from its safe haven status as the flight to quality continues.

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