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Our AUD/NZD trade has moved against us but fundamentally the trade is sound and technically it is testing key support levels. This past week we learned that the Reserve Banks of New Zealand and Australia are thinking about lowering interest rates with a potential cut coming as quickly as August. The RBNZ was the most explicit. In their “special” economic assessment, they said it is “likely that further policy easing will be required” because the strong currency is driving inflation lower and holding down tradable goods. In response to these comments, economists have rushed to lower their rate forecasts with some now calling for easing in August AND November. In contrast, the RBA simply said they may “make any adjustment to the stance of policy that may be appropriate depending on data.” The language used by the RBNZ was far stronger than the RBA.
Technically, AUD/NZD has pulled back sharply and the decline has taken to a major support level above 1.06 (our stop is below this level). Between 1.0600 and 1.0650, we have the first standard deviation Bollinger Band, former breakout level, the 23.6% Fib retracement of the 2015 rally and the 61.8% Fib retracement of the 2015 to 2016 decline. If 1.0600 (or more specifically 1.0580) is broken the next stop for AUD/NZD will be 1.0500 but if it holds this level, AUD/NZD should trade back above 1.0700.