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Will AUD/NZD break 1.10?
Will AUD/NZD break 1.10?
Tonight is a big night for the Australian and New Zealand dollars. New Zealand’s terms of trade is scheduled for release followed by Australia’s retail sales report and the Reserve Bank of Australia’s monetary policy announcement. Over the past few weeks, NZD has been hit hard by weaker economic data, lower dairy prices and the growing expectation that the RBNZ will leave interest rates unchanged this month. The Australian dollar also lost value on the back of lower iron ore prices, disappointing consumer confidence and demand. However the sell-off was not nearly as pronounced in AUD as it was in NZD and as a result, AUD/NZD performed quite well, rising to its strongest level in 5 months last week. Whether these gains are sustained will hinge in large part on tonight’s RBA rate decision because the recent decline in dairy prices means that New Zealand’s terms of trade most likely weakened. The RBA on the other hand may not be as pessimistic as the market anticipates which means that if they maintain their neutral bias, AUD/NZD could hit 1.10. Based on today’s steep decline in the Australian dollar, it certainly looks like investors are positioning for weaker data and less optimism from the central bank. While a surprisingly large drop in building approvals and continued decline in iron ore prices drove the sell-off in the currency, there was also good news out of Australia and China with manufacturing activity improving in both countries. In fact, it is this improvement abroad that could lead the Reserve Bank to look beyond the weakness in domestic demand. Since the last monetary policy meeting, there’s been just as much improvement as deterioration in Australia’s economy and the same is true of the country’s largest trading partner, China. Business confidence increased in the month of April, inflationary conditions improved and the unemployment rate held steady, which are all reasons why the central bank could maintain its neutral monetary policy bias and if they choose to do so, it would catch many AUD traders by surprise and lead to a renewed rally in AUD/NZD. However if they grow less optimistic, then AUD/NZD could drop back below 1.09, putting the overall inverse head and shoulders breakout at risk.
Taking a look at the daily chart of AUD/NZD, a very clear bullish reversal pattern has formed, signaling the beginning of a broader rally. The break of the February swing high of 1.0945 was very bullish and a clear break of 1.10 would validate the upside breakout. If AUD/NZD breaks this level, there is no major resistance until 1.12. However if it drops below 1.09 and negates the bull pattern, the reversal could extend down to 1.0750.