Will AUD/NZD Bounce Off Parity?
Fundamentally, the slide in AUD/NZD has been driven primarily by AUD weakness. The currency has been hit hard by falling iron ore prices and weaker Chinese data. The Reserve Bank of Australia is scheduled to meet next week and many investors fear that the central bank will lower interest rates again. However, since they lowered interest rates in February, the Australian dollar has weakened against many major currencies, providing the RBA with some leeway if they choose to wait on cutting rates. It will be a close call because weaker manufacturing and trade activity has been offset by stronger service sector activity and healthier labor market conditions but if the RBA cuts rates in April they will either shift to neutral or signal a long pause before lowering rates again, minimizing the sell-off in the Australian dollar. The Australian dollar is also not far from their target rate of 75 cents and we believe they do not want to see AUD/NZD below parity.
AUD/NZD is at a record so there is no support level until parity, which is psychologically and technically important. However the following chart shows how AUD/NZD bounced before and after testing 2 key levels that are not as significant as parity – 1.10 and 1.05. When AUD/NZD broke below 1.10 in September after spending some time above it, it dropped to 1.0917 before bottoming out and reversing sharply higher. In December when it broke 1.0500 it hit a low of 1.0430 before bouncing back above the 1.05 level to 1.0570. We are long at 1.0065 with another order to buy below parity at 0.9950. If AUD/NZD holds parity then great but if it breaks below parity our second entry should be triggered giving us a nice average price that would position us for a bounce back above this key level.