NZD/USD Daily Outlook Feb. 16, 2012

By: Christopher Lewis

The Kiwi dollar is one of the most favored “risk on” trades for currency traders. The Aussie is another one, but unlike the Aussie, this pair is relatively illiquid. (Not horribly so, but enough that it moves much quicker than the AUD.) The pair is highly correlated to the commodity markets, and the willingness of traders to buy non-bond assets around the world. The high yield also is attractive in times when currency traders think the possibility of a pullback is low.

The pair initially saw a move up in the early hours of the Wednesday session as the Chinese were said to be open to the idea of pumping some of their considerable cash into the European Union debt markets. The idea is nice, but also one that has been mentioned more than once in the past. The knee-jerk reaction was eventually faded as cooler heads prevailed.

Adding to that was the fact that the Europeans have pushed back the agreement to dole out the next bailout package to the Greeks. The group has mentioned that the Greeks aren’t quite there as far as compliance, and the inability to get implicit guarantees from the supposed incoming Prime Minister to keep austerity also weighs upon the EU members. Times are certainly getting tense in the EU.

Shooting Star

The move created a shooting star in the pair, and more importantly it was formed at roughly the 0.8350 level. The area is a massive consolidation area at this point in time, and looks like a good place for either a consolidation and grind sideways, or perhaps a pullback in this very strong market. It looks by the shape of the candle that the latter might possibly be the case.

The pair has a lot of believers, and as such we think this is a short-term bearish signal, and a serious bearish position can’t be considered until we close below the 0.80 level. However, in the mean time we think that a nice counter-trend move is in the cards. On a break of the lows from the Wednesday session we are willing to sell with a target of 0.82, but would also be willing to buy if the top of the shooting star from Wednesday gets broken to the upside, as it would show serious bullish momentum stepping back into the market.