Top Trade Idea For March 26th, 2014 – AUD/NZD

Earlier this month the Reserve Bank of New Zealand decided to increase the Official Cash Rate (OCR) by 25 bps to 2.75%, making it the first central bank within the G10 FX arena to raise interest rates since the global financial crisis. Ideally, such a result should have been bullish for the Kiwi (and in general it has been over the past 2 weeks), however it has been outshined by its fellow antipodean partner, the Aussie. Interestingly, a few hours after the RBNZ rate hike announcement, Australia’s February Employment report was released and it was a bombshell – Employment change: +47.3K vs. expected +15K & Jan. was revised higher from -3.7K to 18.0K, and the Unemployment rate remained at 6.0% even though the participation rate increased to 64.8% from 64.6%. As a result, we saw AUDNZD put in a potential double bottom around 1.0540/50 and it has continued to rally over the past week.

Technically, AUDNZD appears to be in wave-c of an overall Elliot Wave a-b-c correction back higher. Overnight, the pair broke above the key 1.0705/10 level, which saw the convergence of longer-term trendline resistance drawn from the October high and the 50-day sma. Should this upward momentum continue, as daily RSI suggests since it has already broken above its corresponding March high in advance to price, then keep an eye on 1.0760/70 (Mar. high, daily Ichimoku Cloud top & 23.6% retracement), followed by 1.0855 (100-day sma) and then 1.0940/45 (2014 high & 38.2% retracement) over the ensuing days/weeks. That being said, daily RSI is nearing the key 60/65 zone once again, which is often characteristic of where bears may look to reenter the market, however a break above this level would signal a renewed uptrend in price.

Economic data & events which may influence AUDNZD through next week:

•  NZ Feb. Trade Balance

•  RBNZ Deputy Governor Spencer speaks

•  NZ Feb. Building Permits

•  AU Mar. Securities Inflation

•  AU Feb. New Home Sales

•  AU Feb. Private Sector Credit

•  NZ Mar. Business Confidence

•  NZ Feb. M3 Money Supply

•  AU Mar. Manufacturing PMI

•  RBA Interest Rate decision

•  NZ Mar. Commodity Price Index

•  AU Feb. Building Approvals

•  AU Mar. Services PMI

•  AU March Trade Balance

•  AU March Retail Sales

•  RBA Governor Stevens speaks

 

Additionally, with the potential to see a further recovery, we decided to put our proprietary model to the test.

AUDNZD proprietary fair valuation model takes into account:

    AUDNZD’s 1-year at-the-money option volatility
    Equity spread between Australia’s ASX 200 & New Zealand’s NZX 50
    5-year interest rate differential between Australia & New Zealand

This produces an R2 of 0.8141 since the beginning of March 2013 and implies a “fair value” of 1.0975.