The NZD on the hourly - Update

RBNZ's criteria for using intervention is to use it when most effective and to take advantage of thin markets. They did so in a thin market (Australia was closed for example). However, raising interest rates and selling their currency is just going to counter each other, another reason for the intervention to be short-lived. At the end, the SHS pattern didn't come into play and the NZD/USD indeed rebounded (actually very close to the 200 SMA). At least for the short-term it returns to its uptrend. It will be interesting to see if the BOJ decision stirs anything up but with bond yields up across the board, changes in carry trade strategies probably won't be a factor.

ATTENTION TO THE NEW ZEALAND DOLLAR ON THE HOURLY!

The New Zealand dollar has made a significant move in the last hour (17:00 Spanish time) from a high of 0.7497 to 0.7464. It looks like a possible head and shoulder formation is coming into play. The NZD is building on downward pressure catapulted by last night’s central bank intervention. We see the bearish spike go from 0.7623 to 0.7530 approx.

-http://www.rbnz.govt.nz/news/2007/3036605.html

The currency may be finding some support on the 200 hour moving average. A very similar technical outlook on the NZD/JPY is also taking place in respect to both the head and shoulders formation and SMA(200).

Traders must also take into account that the New Zealand Federal Reserve surprisingly hiked interest rates to 8% last week putting the carry trade strategy back on the forefront.

Remember that carry trade liquidation was a central issue a few months back since Japan started raising interest rates upon reappearing inflation signals. However, if New Zealand does not let up on their hikes, the interest spread will remain wide enough to incite carry traders (8% for NZD vs. 0.50% for JPY).

No rebound has been seen since the NZ bank’s intervention yet, however, it is important to remember that the currency market is very difficult to manipulate, even for central banks. Thus, this will unlikely have a lasting effect. The currency market is an immensely liquid market with over 2 trillion dollars traded on a daily basis.

PATIENCE IS A VIRTUE

Successful traders will let opportunities come to them instead of chasing them. The EUR/USD has had a relatively low volatile experience in the last couple of weeks, rarely varying a little over 100 pips. It has roughly been trading in a tight range since May 18 between 1.3400 and 1.3550 if we take into account some low and high spikes.

Of notable interest was the significant support being formed around the 1.3400 level, tested at least a couple of times meaning that a breakout could have been significant. It would have been very difficult to capture any big movements in the meantime unless we were looking at a very short-term picture. As we can see on the above hourly chart, in retrospect, a breakout of this range would look tempting, especially on the downside.

Such was the case as the biggest profit-taking opportunity came after 3 weeks of range trading. Ideally we would place a limit entry sell order around 1.3400, confirming the breakout of the horizontal support. A stop order of about 30 pips (1.3430) would save us from a significant rebound. We would ride the breakout until it ended around 1.3340, closing our position and taking a 60 pip profit. Note that this significant breakout of the range gave us a very attractive reward to risk ratio, risking our 30 pip stop but getting 60 pips in return!