Long

Fed Rate Cut NZDUSD Trade (3-6 Months)

Updated

First, some additional charts to set the fundamental foundation for this trade and then the technical aspects.

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First, there's a giant inside-pitchfork drawn based on a monthly chart.

Here is the TradingView Wiki's explanation of how to trade pitchforks for understanding:

"The basic idea behind the use of a Inside Pitchfork and a standard pitchfork is that it essentially creates a type of trend channel. A trend is considered active as long as price stays within the Inside Pitchfork channel. Reversals occur when price breaks out of an Inside Pitchfork channel."

Pitchforks are a Technical Analysis tool used to interpret trend, and determine if it is overbought, oversold, or at the mean. The mean is the thick red line and we assume the price gravitates to it like a Moving Average. The mean line on this inside-pitchfork will be our focus on the Weekly and Daily charts to create take-profit targets.

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You can also see a diagonal ray drawn as a downtrend, which is above this trade's red "target box." It's between this monthly inside-pitchfork's mean line, and this monthly downward trend line where we will be looking to take profit.

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A Fundamental and Weekly Trend Analysis

Much of this trade is based off of US Federal policy, and on counter trend trading the gross short interest on NZD. On June 20th, the Fed's rate is effectively at 2.4%. The speculative net positions short are increasing on NZD and AUD.

investing.com/economic-calen.........
investing.com/economic-calen.........

Asian currencies are hurting as well. This trading point takes inspiration from a tweet storm of fundamental statistics posted by @Trinhnomics. twitter.com/Trinhnomics/status/1.........

Now, compared to the Fed's target low rate of 2.25%, or just a 15 basis point drop , Jerome Powell has said in a recently aired interview that he wants to keep the interest rate at least above 2%.

At 18 Minutes, he addresses the issues that Trinhnomics mentions the growth problems with Asian countries that use lots of USD, and goes on to talk about wanting to stay above 2%. youtube.com/watch?v=XXX4jgBj.........

President Trump wants a cut, and one in the range of 2-2.25% could satisfy him politically. Trump wants to hit new ATH in the stock market, so lets say above 3000 SPX . A cut or two into that range could take the SPX to those levels.

The next 2 Fed meetings will be on July 30th-31st and September 17th-18th.

The trade goes as follows:
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Enter a position long before July.
If the Fed Rate decision is to cut keep the trade, and anything else should end this trade.

If the cut was not sufficient and did not help the hurting economies dependent on the dollar, or help Trump's political economic targets, there may be another cut coming in Sept. To clarify, "Help" for those Asian countries just means that their investments are either less negative than they are now, or even positive. With that in mind, a second cut could cause a breakout in price to break 2019 NZD highs, and possible short-term reactions could cause price to go higher than 0.715 before a third Fed meeting unless the USD is preforming poorly for some reason.

NZD speculative net positions will likely start to show signs of improving. As the effects of cuts to help the Asian countries receive investments again would help NZD investments as well.
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Improved Weekly chart than the one just posted, includes another resistance point and more accurate price targets.

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How it looks as a Daily chart:

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As far as Technical Analysis goes, there are enough signals in my system to justify a long trade. So lets establish this trade's entry and exits.

This trade's entry, for technical reasons, is based on the TD Sequential Weekly Sell 2 above a Sell 1. I entered a buy signal on the daily, and the fact that if the weekly closes well then I can take thing from a swing trade into a longer term, fundamental trade.

We are approaching the 50SMA (in red) and a close and open above it would be a nice bullish signal. Though, I am preemptively entering because I think that this signal is lagging compared to the fundamental arguments made earlier. I expect that upon increased speculation of a Fed Rate cut, that we will begin trading at a price above this MA.

There is resistance at the 200SMA (in blue), which also correlates coincidentally with the mean of the inside-pitchfork (the very thick red line). This area (0.69700) was previous price resistance at the beginning of 2019. If those highs are broken, then the likelihood of meeting or breaking the 2018 highs becomes a new option.

The current environment technically is different also based on the lows. 2017 had a low of 0.67800, and 2018 made a new low of 0.64250. Assuming that we are not going to break the low made in 2018, then we have made a higher-low in 2019 at the price of 0.64800. This will be our reasonable stop loss.

Whether we are rejected from 2019 high, or break through it will be based on volume indicators: the OBV and Accum/Dist. Volume above the red line, which is drawn back to 2013, has provided significant resistance to NZDUSD . So, because we have touched this line multiple times since 2017, it seems like the NZDUSD volume traded will at least take us back to that red line again. A failure to break this red line on the volume indicators, while price is inside of the target price box (drawn in red inside the take profit green triangle), the likelihood of a reversal at that point is likely.

This leaves us with 2 take profit price levels, thus 2 opportunities to exit this trade if it pans out. This is shown by the 5.6% and 3.6% price range arrows respectively.

Finally, the SMI Ergodic Oscillator, a variation of the RSI Stoch , should go up if the "momentum," or price action, of this move also goes up. SMI is more of a reversal indicator, and I use it in conjunction with the TD Sequential 9 reversals. If you back test the last 3 times we were over or under sold on the SMI and when TD 9s were signaled at the same time, we had successful weekly reversals on NZDUSD . (except for in late 2017 where SMI failed to go oversold, and therefore, did not give a signal.)

So, for the SMI, I am looking for it to at least reach the red line, or prior high, in conjunction with the volume indicators not breaking their red lines. That would help with confirmation for a future reversal. Though, if SMI were to go oversold, then I'm looking for a TD 9 reversal with volume still below their red lines. If volume breaks out above their lines, it would be best to ignore SMI if it's oversold and assess any new fundamental trading information.

The maximum this trade could reach before Jan of 2020 is 400 pips, but it's unlikely. 240 pips is most likely, while anywhere between 240 and 380 pips is expected so long there are 2 Fed Rate cuts with long speculation. The risk is 160 pips, and the trade should take between 3-6 months.

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I asked for ideas on this trade in the Forex TradingView trollbox and ivan0501 commented:

"You're right on spot.. Not really into NU trading lately, check gold/commodities co-relation with nzd to see how much that gap shrinked. Dollar has yet to confirm long term trend.. rbnz on the other hand acts suspicious a bit, cuts were hinted on last meeting, specially due global slowdown and worrying housing slowdown impacting consumer spending.. however pair is more dependent on us lately.."

First we compared NZDUSD against Gold in US Dollars:

Ivan continued, "Absolutely. Measuring single currency strength vs non fiat asset with instrict value not dependent on cb's is quite useful, specially in this type of market where uncertainties hit every single economy.. not that gold or commodities are not manipulative, just global demand for high yielding asset is telling you half the story today. Check forex databank, free web, just they didnt update for 1 month which is unusual. You can use charts and compare each asset"

I thought a better comparison would be to use an NZD index and compare it against Gold in NZD:

Gold in NZD, compared to the NZD FX index, looks over extended. Today, news was released in Reuters talking about a 1% drop in gold but maintaining $1400:
uk.reuters.com/article/global-precious/precious-gold-sheds-over-1-as-bets-for-big-fed-rate-cut-fade-idUKL4N23X3E5

The article said in conclusion, “Prices should hold and continue to trend higher, unless there is some resolution on (U.S.-China) trade issues.”

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Following the statements from the Fed officials, gold sapped gains and has dropped nearly 2.6%. Lower interest rates reduce the opportunity cost of holding non-yielding gold, prompting investors to sell some.

The comments by Powell and Bullard have assisted in “enabling the dollar to find some much-needed support and undermining buck-denominated precious metals,” Fawad Razaqzada, market analyst with Forex.com, wrote in a note, adding that a rebound in equities on trade talk hopes between U.S. and China has further pressured gold.
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My interpretation is that the Fed is looking to make a rate cut less than 50 basis points, while keeping the rate above 2% to stimulate "just enough" growth abroad and in the equities market without the dollar becoming inflated to a severe, recessionary degree.

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Earlier in the fundamental analysis, we looks at net open interest between AUDUSD and NZDUSD. Why wouldn't we trade AUDUSD instead? Could AUDUSD possibly be a better trade using the same fundamental and technical information?

Could AUDUSD preform better than NZDUSD is the question.

So lets look at 2 charts comparing AUDUSD and NZDUSD on a Monthly technical scale. We'll use the inside-pitchfork to establish trend, and we'll use the Fibonacci Retracement tool to establish how much each pair has pulled back relative to their respective high's in 2011.

We can see that NZDUSD has an upward trend, while AUDUSD has a downward pitchfork trend. AUDUSD has also gone below it's 23.6% retracement, while NZDUSD has remained above it's 38.2% retracement over the same period of time.

Now, just two technical tools are not definitive, and AUDUSD could reverse and it would in fact be more profitable to take on the AUD trade as the upside surprise could create a life-changing trade opportunity. Though, lets take into perspective what external forces may be causing a weaker AUDUSD and if there are any reasonable fundamental changes that could create a bullish scenario.

First, the bad, Australia's coal exports (which are it's largest export) to China has been officially cut in half since 2018.

reuters.com/article/china-economy-trade-coal/chinas-australian-coking-coal-imports-halve-in-may-from-april-idUSL4N23W2IX

Quote the article:
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China’s imports of Australian coking coal in May plunged 49.3% from a month earlier, customs data showed on Tuesday, as buyers held off purchases because of uncertainty regarding government policy on Australian imports.

Arrivals of Australian coking coal were at 1.38 million tonnes last month, down from 2.72 million tonnes in April, according to data released by the General Administration of Customs.

That compares to 2.09 million tonnes in May 2018.

Australian coal imports have been subject to delays because of extended inspections at ports amid trade tensions between China and Australia. The delays do not appear to be easing.
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China has, as of June 9th during Xi's meeting with Putin, disclosed in new trade deals with Russia outside of their already lucrative Belt and Road Initiative. The new supplier of Chinese coal, outside of what's subsidized inside of China, that could take major market share from Australia is Russia. This would be a boom for the RUS, which is an idea for a different trade and one I encourage you to begin researching.

Next, Australia's interest rates will likely have to lower in order to compensate for the lack of income and investment coming in from coal.

For Australia's FX to improve, some of these trends need to be reversed or AUD will continue to preform worse than NZD.

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On a micro economic level, local banks have been decreasing their interest rates in anticipation of a Fed rate cut.

youtube.com/watch?v=AGauMQ8_LrA

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Here is an update on NZDUSD's progress related to the idea, the picture below includes my annotations and thoughts about the probabilities of what could happen.

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Additional commentary from WallStJesus, part of the Sang Lucci group, about the macro economic effect of how the market would effect based on how the Fed decides to cut, maintain, or hike rates
youtu.be/UPD4fkWsaBs?t=3578

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I was curious if I was actually right or not in my comparison of NZD vs AUD, and that NZD would be a better investment than AUD over the time this trade takes place. Here is a picture of NZD:AUD:CAD:EUR all against USD pairs compared to each other based on percentage changed over the last month.

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Notice please, that USDCAD percentage should be inverted. All pairs are XXXUSD, not USDXXX. We're comparing against the USD, not trading USD. So please keep that in mind when looking at CAD performance in these two charts.

Here is the most recent 5 days relative percentage change. I also added a line to this chart marking June 26th, which was when this idea began being formulated.

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An improvement, with CADUSD instead of USDCAD, percentage change over the last 5 days, with line marking day the trade idea came out.

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Screenshot and annotations on the current movement:

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Here is the same chart as above on a 4H timeframe:

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Compared to the update 14H ago, AUDUSD and CADUSD have gone down 0.45% and 0.3% respectively. NZD moved 0.35% to the downside, but has maintained it's value best against the dollar relative to other currencies over a 5D period.

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The non-farm jobs report numbers came in and moved NZDUSD down about 60 pips.

bloomberg.com/news/articles/2019-07-05/u-s-jobs-top-forecast-as-224-000-gain-dilutes-case-for-fed-cut

Quote from the above article:

“A 25-basis-point cut is still on the table,” but the report removes the chance of a 50-basis-point reduction, said Ryan Sweet, head of monetary-policy research at Moody’s Analytics Inc. “It makes the debate for a cut more lively. This job number eases their concerns that the labor market was slowing more abruptly than they anticipated, but the trend is that it’s still moderating.”

Personally, I was assuming a 25 basis point cut in July and another in Sept. The main reasons I had for this kind of cut was because it would help out Emerging Markets massively. Billions of dollars have been positioned into EMs, and it is likely that if a cut occurs, those dollars would have a nice payoff.

Overall, compared to what the Fed said in interviews I had posted above, a 25 bp cut is now what I'm expected going into the Fed meeting at the end of July.

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Here are photos going on how I traded this movement long successfully so far:

First Screenshot: No trade on. Currently looking for the earliest signs of bullish movement; green candles, with my choice of indicators also flipping bullish.

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Looking up some studies, I found that the 50% fib level is the most likely for a reversal. It's hard to see, but I place a green line right above it in that screenshot. Depending on how price moves back above the retracement, and my green line, which I would consider a good entry, I would take a low risk long position.

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Second Screenshot 5M:

Based on how I trade the TD Sequential Setups, and what I said about 50% fib retracements, and that I have a long bias because of fundamental reasons; I consider this as a good entry point for me.

Here is what I saw on the 10M timeframe:

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Fourth Screenshot out of 5:

This chart looks like the retracement was successful, and the entry would currently be in profit. A stop below that low, again taking low risk, would be optimal; and if you got stopped out you could assess the chart again for either a short or long setup.

I assume that a long above the prior Combo 13, Buy 9 candle would be a comfortable place to range between, or for a break and a retracement back to test it for strength.

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5/5:

This is where the price is currently. The trade so far has been done successfully.

Like I said in the prior comment, I expect a retracement to that price. Though, a break of the new recent high would indicate that the price will begin to start trending up again.

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The week has opened up so far, so good. We hit a resistance last week that was the prior range's low. Price was swiftly rejected due to strong jobs numbers in the US. Because of this a 50 basis point Fed Rate cut is unlikely, but President Trump is still leading the charge on some cuts. Wall Street agrees by taking on more risk in the stock market. A rate cut of 25 basis points is currently expected.

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After reading some studies on fib levels, I found that that level which a reversal is most probable to happen, or likely in a statistically significant way, is the 50% fib retracement.

This information is valuable because on the daily chart we can see that price hit, and even dipped under the 50% fib retracement; then price actually retraced immediately afterwards. Whether or not NZDUSD will have staying power above the 50% fib is something that'll need to be assessed in the future once the minor trend has changed.

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A visual on the 4H timeframe of the 50% fib retracement.

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Here is a visual on the 10M chart which has various signals to take potential low size, low risk long trades; in order to trade the bottoming out and reversal.

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Looking back, that 10M Buy TD 9, at the 50% fib retracement, was an optimal place to enter long.

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Back again, the pair had a significant pullback and then shot back up to the prior high. The weekly chart looks very promising technically if there's a confirmed Sell 2 above a Sell 1 in the TD setup count.

On the daily, we can get a promising signal with a new open and close above the 200 daily MA.

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A confirmation on the daily timeframe would help solidify a good entry on the weekly timeframe if you think the probability of the week closing above the high is likely to happen.

Trade closed manually

During the runs ups and down over the last few weeks, there were many tradable opportunities to make money.

This idea's plan was based on the Fed Rate cut causing NZD to appreciate against the USD. In reality, the Cut caused USD to appreciate against the NZD. This is because the USA has had very strong economic numbers against the world. Other trading partners of New Zealand have had troubles financially due to the US v China trade wars, as Asia tries to reshuffle it's supply chains in order to provide it's product around the world.

Investment into the US equities market has proven to be the better investment currently over emerging markets. If opposite were true, traders would be exchanging their USD to catch onto the EM trend. We know billions of dollars have recently been allocated to this market, and we have yet to see if those trades will pan out profitable.

There has been little reason to exit the USD, and with the Fed Rate cut it has made access much easier for banks to get dollars from the Fed in order to lend. Overall the US has a positive 2020 outlooks in my view now.

While NZD preformed very well, and I had many great trades over the last few weeks on it; it is now time to move onto the next pair that I think will preform well for my portfolio.

This trade's plan was to exit if there was no Fed Rate cut, and according to this trade idea I should continue to hold a long position on NZDUSD. The circumstances have changed since the original analysis. The US Equities markets have preformed great, the EU is having accelerated economic issues with the Euro, and Asia has not finished shuffling it's supply chain so that it can avoid trade war tariffs. These three points have caused the NZD to look like a less attractive investing and trading opportunity compared to the USD. While there were some great run ups and downs I was able to grab, I do not see that continuing for this pair after how strongly pro-USD this Fed Cut was.

joebaus

Joe Baus, bausbenchmarks.com

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