AUD/NZD – RBNZ vs Drought determining Kiwi direction

After last week’s RBA decision, or non-decision rather as RBA maintained cash rate and stated the same dovish “if necessary” tone ad verbatim from Feb’s decision, market expectations for RBA to slash rate has decreased. Current Overnight Index Swaps indicate market pricing in a 19% chance of a 25bp rate cut in April – a huge fall from 50 over percent in the days after Feb meeting and before the Mar meeting.

RBNZ on the other hand, surprised us with a dovish tone back in February after maintaining a mostly hawkish stance for most part of 2012. This surprise led to AUD/NZD moving higher after, recovering from the lows we’ve seen in mid Feb 2013.

Daily Chart

Price is now back at 1.25, the support for Dec and early Jan trading. The last time we’ve managed to reach this high is back in 1st Feb. The technical implication of 1.25 is huge – besides being a round number key support, if price is able to breach above the level, the breakout below 1.25 would be invalidated, placing initiative on the bulls side. However, a full bullish bias will require price to preferably trade above the 1.27 ceiling in order to break the Lower Lows and Lower Highs sequence.

Stochastic readings is suggesting that 1.25 may hold, with readings looking to top. The last time readings reached such high levels was in Nov 2012, which preceded the strong sell-off from 1.27 to 1.25. Hence traders should take note and look for any bearish confirmation along 1.25 that may agree with the Stoch topping scenario.

Hourly Chart

Funnily, Short-term chart is firmly on the upside, with prices printing higher highs and higher lows, and Kumo providing ample support. Stochastic reading is heading lower, with some room to spare potentially for price to breach 1.248. Based on Stochastic indicator alone, it is unlikely that price may breach multiple support as readings may most likely reached Oversold region should price hits below 1.2440. Nonetheless, with RBNZ Decision coming in tomorrow, we could see Kiwi strengthening to push AUD/NZD back lower and affirming 1.25 resistance.

With all the Central Bankers talking and not acting, market has desensitized to a large extent towards dovish talks. As such, the likelihood of short-term bullishness is high as long as RBNZ does not surprise market with a rate cut tomorrow. However, there are current fundamental weakness in NZD. The drought hitting New Zealand is having a toll on the economy and NZD by extension. Any short-term rally post RBNZ may attarct bears to sell at a more attractive price, forming a bull trap. Hence traders may wish to keep on their toes to prepare for high volatility tomorrow.

 More Links:
Nikkei 225 – Disunity threatens bullish sentiment
NZD/USD Technicals – Bulls feeling the heat

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