AUDNZD trade receives a boost

In yesterday’s note, we spoke of the release of softer than expected Australian construction work data for Q2 and the threat that ongoing weakness in Australian construction posed to the activity and employment outlook here in Australia. Today it's New Zealand’s turn to feel the heat as the ANZ Business Outlook Index fell 8 points in August to -52.3, the lowest level since April 2008.

In the lead up to today's release, there were hopes that the RBNZ’s 50 bp cut to the overnight cash rate (OCR) on August 7^th would halt the deterioration in business confidence, investment and employment. Unfortunately, this has not been the case and firms remain downbeat and pessimistic in their outlook for the NZ economy.

Today’s fall in business confidence is likely to spark further speculation that after a total of 75bp of cuts by the RBNZ in 2019, interest rates in New Zealand may have reached the effective lower bound in terms of their effectiveness to stimulate borrowing and restore confidence within the economy.

That said lower interest rates have been effective in providing stimulus via other channels, namely through the exchange rate which brings me to the subject of today’s note, the AUDNZD cross rate which is currently trading at a three-month high of 1.0655.

Just over two weeks ago, we wrote a piece which contained a recommendation to go long AUDNZD at 1.0520 https://www.cityindex.com.au/market-analysis/trump-cheer-supports-audnzd/.

The bullish view was based on a combination of technical and macro reasons, although at the heart of the decision was evidence that AUDNZD had broken and closed above the top of the trend channel it had spent the past four months trading within. Adding extra appeal to the trade it was an identical set up to a trade recommended in early April which delivered good results.

So far so good for the current trade. I will be looking to take profits on half of my long position just ahead of the April highs, 1.0720/30 area. I will run the remaining half of the long position looking for a move towards 1.0850. In the interim, the stop loss on the trade can be raised from 1.0445 to 1.0545.

Source Tradingview. The figures stated are as of the 29th of August 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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