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RBA and RBNZ have opposite plans in QE, how to trade the AUD/NZD?




May 19, 2020 12:30

The Coronavirus and resulting lockdown of the economy have spared no countries, including Australia and New Zealand, even though both countries haven’t imposed as strict measures as countries in the eurozone or the US.

The Australian economy saw a jump in its unemployment rate by 1 percentage point to 6.2% and is expected to rise to 10% by the end of Q2/2020 with first estimates showing the unemployment rate in Australia to stand at 9.00 in 12 months from now.

Despite economic collapse: Aussie with a strong performance against the Kiwi

Despite the Aussie performing very strongly against New Zealand’s Kiwi, gaining around 8% in two months from its March lows of around 1.0000.

The reason for that performance is probably the more skeptical economic outlook and potential countermeasures from the RBNZ: while the unemployment rate in New Zealand is expected to be around 8% by the end of Q2/2020 and to stand at 8.5% in 12 months from now, the GDP Annual Growth Rate in New Zealand is expected to be around -11% by the end of Q2/2020 compared to ‘only’ -7% in Australia at the end of Q2/2020.

As a result, the RBA curtailed its Quantitative Easing as financial market conditions started to improve a little and decided against buying government bonds at the last meeting at the beginning of May.

On the other hand, the RBNZ nearly doubled its QE purchases to NZD60 billion from NZD33 billion and opened the door to negative rates at her last meeting.

That monetary policy divergence is given, the mid-term advantage in the currency pair seems to be on the long side.

How to trade AUD/NZD in this environment?

Still, we are not that optimistic for AUD/NZD, at least not in the coming two weeks.

First of all, we consider the mode technically to be quite extended on the upside with the currency pair finding a strong region of resistance around 1.0800/50, its 2019 yearly highs thus favoring at least a short correction into the region around 1.0700/50.

In addition to that, AUD/NZD also enters a bearish seasonal window which developed over the last 25 years during the period between May 19 through May 27 and delivers a chance for us to formulate an idea of how to possibly trade AUD/NZD from the Short side.

The key parameters of this seasonal bearish pattern are: between May 19 and May 27, AUD/NZD saw an average drop of 133 pips for 18 of the past 25 years.

In the remaining seven years, it gained on average only 40 pips, while the maximum loss and the maximum drawdown being 149 pips.

That in mind, Long engagement in AUD/NZD, even though justified from a fundamental perspective, get unattractive and we favor AUD/NZD Short trades with a stop above 1.0850 and 1.0680/0700 as a target on the downside between May 19 and May 27:

Source: Admiral Markets MT5 with MT5-SE Add-on AUDN/ZD Daily chart (between March 5, 2019, to May 15, 2020). Accessed: May 15, 2020, at 10:00 pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the AUD/NZD increased by 1.8%, in 2016, it fell by 2.7%, in 2017, it increased by 6.2%, 2018, it fell by 4.7%, 2019, it fell by 0.6%, meaning that after five years, it was down by 0.5%.

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Disclaimer: The given data provides additional information regarding all analyses, estimates, prognosis, forecasts or other similar assessments or information (hereinafter “Analysis”) published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

  1. This is a marketing communication. The analysis is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
  3. Each of the Analyses is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter “Author”) based on the Author’s personal estimations.
  4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for the prevention and management of conflicts of interest.
  5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer to any past performance is not a reliable indicator of future results.
  6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies herein or that losses in connection therewith mayor shall be limited.
  7. Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  8. The projections included in the Analysis may be subject to additional fees, taxes, or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.

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