Tapering is Coming – Strategy Ideas & AUDNZD Case Study – Part III

The AUDNZD trade idea spotted last Tuesday is working out as planned. Getting the right side of a week-long market move is always a nice-to-have, and with current price levels in the region of 1.057, there’s a sizeable gain on long positions taken at the 1.04571 trade entry point.

AUDNZD – 1Hr price chart – Heiken Ashi Candles

Source: IG

Riding that trend would now represent a 1.08% return; however, possibly more importantly, the price move illustrates how powerful the unwinding of positions in crowded trades can be. With the markets full of crowded positions based on years of loose monetary policy, there could be more opportunities around the corner as global central bankers switch into ‘tapering’ mode.

Case Study III – Managing Trade Exit Points

The upward AUDNZD price move has been relatively steady but also strong. Price has touched and bounced off the 1Hour SMA. A trailing stop loss below that metric now looks like an appropriate step towards locking in some of the still unrealised profits.

Another positive note for the bulls is the Heiken Ashi candlestick patterns, which still point to a continuing trend.

The long AUDNZD trade idea was built mainly on positions in Aussie being overbought and Kiwi being oversold. Data from CFTC pointed to these moves breaking recent records, and the interest rate announcement by RBNZ last Tuesday was the catalyst for traders to reassess. When the central bank announced the probable 0.25% interest rate hike rather than the possible 0.50% one, the appetite for Kiwi drained out of the market.

Case Study III – Cross-referencing to Other Markets

Confirmation that this looks like a trade unwind is supported by the lack of trends in other markets.

EURUSD price levels moved only 0.16% between the 4^th and the 11^th of October. Gold and silver prices over the same period moved only 0.17% and 0.22%, respectively. There were more substantial moves in equities, with the FTSE 100 moving 0.64%, but that gain was posted after a significant sell-off in September which took price volatility levels up a notch.

Aussie strength could be down to an easing of geopolitical tensions between Canberra and Beijing. Those who think that the Evergrande focused concerns about China’s economy could also be buying Aussie. Any news events which suggest the delivery of raw materials from Australia to China might return to business as usual will support the currency.

There’s little need to cap upside potential by taking profits at these levels. There are enough technical indicators to suggest momentum is still driving price upwards, but all unwinds finally unravel, so some kind of trailing stop loss would appear appropriate. The initial target price of 1.07, which was explained here, still holds, but some will be looking at the secondary target price of 1.0614 as a potential resistance level. That marks the 50% Fibonacci retracement level of the downward price move dating back to the 25^th of March.

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