August 18, 2021

Short AUD/NZD Setup After Bounce?

 We’ve got one more Kiwi pair to check out before the highly anticipated monetary policy statement from the Reserve Bank of New Zealand hits the wires.

And this time AUD/NZD hits the radar after a pandemic induced hit to Kiwi. Is this an opportunity for sellers to play the downtrend at better prices?

Short AUD/NZD Setup After Bounce?

This past week, we’ve been covering NZD pairs (NZD/JPY, NZD/USD & EUR/NZD) ahead of this week’s RBNZ monetary policy statement as this event usually does not disappoint, in terms of sparking volatility for forex traders.

We’ve spoken those post about how the New Zealand dollar has risen on speculation that the RBNZ will hike interest rates this week, and potential reactions to various scenarios we may see from them soon.

Well, Kiwi traders just took a left turn during today’s Asia session after it was announced that lockdown protocols will be re-instated for the next three days in New Zealand. One confirmed case of covid-19 was discovered today, the first since February, and it looks like the government ain’t taking no chances.

The New Zealand dollar took a quick hit on the news, enough to bring the Kiwi back to levels last seen at the beginning of August, before rate hike speculation started. Is this the second shot at going long the Kiwi that the bulls have been waiting for?

Well, this lockdown development may influence the RBNZ to sound a bit more dovish than previously expected, likely lowering their growth outlook in the short-term. The longer-term will likely depend on how the covid-19 situation develops and if the lockdown does end quickly. Now, there’s even a possibility that the RBNZ could hold off on any tightening, which would likely send Kiwi even lower.

For those with confidence that New Zealand will able to contain the situation quickly, this pullback in the Kiwi is likely an opportunity to buy, and doing it against the Australian dollar is definitely a market to express that view. Australia is under strict lockdown that is not likely to end soon, which significantly lowers the odds of the pandemic recovery and potential monetary policy tightening from the Reserve Bank of Australia.

And with both the Kiwi and Aussie being considered “risk-on currencies,” the broad risk sentiment influences that tend to be the main market drivers are less of a factor on the pair’s price, which means that the divergence in pandemic / policy stories will likely continue to drive AUD/NZD lower.

For those who think the RBNZ may actually hold off from tightening, you may want to wait for the actual RBNZ event before considering whether or not shorting the New Zealand dollar makes sense. If that scenario does play out, we’ll drop out NZD bias for now and stay away from AUD/NZD for now given Australia’s situation with the pandemic.

What do you all think? Will the RBNZ shift their economic outlook and stance on interest rates? Let me know in the comments section below!